Second Investor Day that we've held, and as it happens, it coincides with our 10th anniversary as a public company. Our debut was on July 1st, 2003, less than two years after AXIS was founded. Interestingly, our theme today is strong fundamentals, continued success. We're all quite proud of what we have built since our founding and our initial public offering. Management will talk at length today about exactly that and what we intend to deliver shareholders as we move forward. In order that we might do that efficiently and allow for a robust question and answer session at the end, I'd like to keep to a schedule. We'll take all questions, as I said, at the end of the presentation. Members of management will present until approximately 2:20 P.M., at which time we're planning for a short 20-minute break.
Following the break, additional members of management will deliver their presentations. We intend to conclude the presentations and commence the question and answer session at approximately 3:00 P.M. This session will conclude at 4:30 P.M., and we ask you to join us for a reception following the formal activities. I have one final housekeeping item. I'd like to draw your attention to the second slide of the presentation, which is the safe harbor statement applying to our discussion today. With that, I'd like to hand the presentation over to our President and CEO, Albert Benchimol.
Thank you, Linda. Good afternoon, everybody, and thank you for joining us today. We aim to demonstrate today that AXIS is a superior specialty insurer and reinsurer with a differentiated franchise, a demonstrable track record of success, and the ability to sustain superior performance into the foreseeable future. We intend to do so by presenting and highlighting our management team and also describing to you some of the initiatives that we have to build on the strengths that we've already established over our first 11 years. Our results will demonstrate that AXIS is an exceptional underwriting company. However, what we hope you take from today's meeting beyond the numbers is the strength, depth, and focus of many of our teams and specialty franchises that speak to the sustainability of our underwriting leadership. We're not just satisfied with that. We're confident that we can improve on it.
You'll hear of our plans for diversifying growth and enhanced portfolio construction that should deliver enhanced risk-adjusted returns. While we've made changes around certain aspects of our risk management and organizational structure, we have not lost any of the positive aspects of our entrepreneurial underwriting culture. You can expect us to pursue our growth plans with the same vigor, creativity, energy, and ultimately success as we have our prior initiatives. All the while, we intend to sustain our strong financial position, characterized by a prudently constructed balance sheet, ample capital, and shareholder-friendly capital management. Our presenters today will include Jay Nichols, the CEO of our reinsurance operation, who'll discuss our positioning in an evolving reinsurance world. Jack Gressier, the President of our insurance company, will talk about how we intend to grow our profitable specialty insurance franchises around the world.
He'll be followed by Chris DiSipio, who will provide more detail about our A&H initiative. After a short break, Michael Steel, our Chief Risk Officer, will discuss some of the analytics that are backing up some of the changes that we're doing in our portfolio. Joe Henry, our CFO, will come in and discuss our balance sheets, our investments, and our reserves. As Linda said, we'll conclude with a question and answer period. My colleagues will also be supported by some other senior members of our management team, including Bill Fischer, the Chief Underwriting Officer of our reinsurance entity, Stephan Knipper, who is the President and Chief Underwriting Officer of AXIS Re Europe, Joe England, who is the President of AXIS Specialty Europe and the Head of Marine in our London office, as well as Tim Cavallo, who runs our AXIS Pro professional lines business.
Let's get on to my part of the presentation, where I'll discuss who we are, review some of our performance, and our strategic and financial goals. We took the opportunity at our first company-wide senior management meeting last year to challenge ourselves with regard to our mission, our values, our goals, and our strategies. We determined to undertake certain changes to reflect the increased size and complexity of our organization and also reflecting the evolving marketplace. We also agreed that a core of our values, our skills, our approach to business represented a competitive advantage, and that we should work hard to preserving them and building on them. We reformatted our mission statement, you may recognize our old mission statement and our goals, where we aim to position AXIS as the leading global diversified insurance and reinsurance company as measured by quality, sustainability, and profitability.
We also reaffirmed our value proposition to provide our clients and distribution partners with a broad range of risk transfer products and services, meaningful capacity, and unquestioned financial strength. Also, very important to us is how we would approach our business going forward by nurturing an ethical, entrepreneurial, and disciplined culture that promotes outstanding client service, intelligent risk-taking, and superior results for our shareholders. None of this is new and certainly not a fundamental change for our company. You may recall when I joined AXIS, I said that we had a fantastic team, great relationships with clients and producers, and a whole array of superior skills. At the time, I defined my job as making sure that we institutionalize these skills, these practices across the company, so that our superior performance can be sustained beyond the current generation, and that's what I intend to do.
Financial goals of our company included at the start, achieving an ROE of 15% over time, we came very close to achieving that. We had a 14% ROE over the first 11 years of our lives. I think we all recognize that in the current interest rate environment, such a goal is very difficult to achieve. We've introduced a new relative performance goal, and that is to achieve top quintile performance across various metrics with volatility that approximated the industry average. You're going to see this chart many times today, so let me just give you the geography. In all cases, volatility will be on the X-axis with low volatility on the left-hand side and the highest volatility on the right-hand side. Performance, of course, will go up the Y-axis. For many of you, the contents of this slide are already very familiar.
We're a hybrid insurance company. We write both insurance and reinsurance. Inception to date, we wrote $36 billion of premium, of which 56% or approximately $20 billion was insurance, and 44% or $16 billion was in the reinsurance. Our all-in combined ratio, inception to date is 89%, with an industry leading 83% in our insurance business and 89% in our reinsurance business. We generated $3.6 billion of underwriting income, and we did that with an underwriting philosophy which is generally viewed as both prudent and conservative. The underwriting prowess that we are showing here is particularly important in today's environment. With a low interest rate environment, every company that I know of is facing lower investment income as we go forward, and the only way to sustain profitability is to increase underwriting performance and to generate more underwriting income.
However, those companies don't have the skills, the culture, the processes in place, they're unlikely to put that in place in time. Companies that don't have a history of underwriting profitability are not likely to achieve that anytime soon. We already have all of the ingredients of a profitable underwriting company, and we're very well positioned to outperform. We built an international platform with close to 1,200 employees in 29 offices across five continents. We did that to get closer to our clients so we can better access the business, better understand the business, and better service our clients and distribution partners. We have risk-bearing entities in Bermuda, the U.S., and Ireland, and we have branches in London, Switzerland, Canada, Australia, and Singapore. Our outstanding team and geographic footprint are supported by a strong and conservatively constructed balance sheet.
Our $7 billion of capital and ratings are a competitive advantage in many markets. That capital is very secure, underpinned by a very prudent reserve base, 63% of which is in IBNR on a high-quality insurance investment portfolio with an average credit rating of double A minus in our fixed income assets. Our compound annual growth rates in value creation, which we define as book value growth adjusted for dividends, has been an enviable 13.7%. As of March 31st, our book value per share was $44.57. We pay an attractive dividend of $1 per share per annum. Incidentally, we've increased that dividend every year since its first declaration. How have we done? Well, first of all, we recognize that you have a wide array of choice in terms of which company you can invest in the insurance industry.
We set for ourselves a peer group of the better companies spanning all of the various approaches and strategies to the business that you can have. You can see in this chart colors representing U.S. specialty companies, U.S. scale companies, diversified reinsurers, cat reinsurers, and companies that, like AXIS, write both insurance and reinsurance. When you monitor the ROE over the last 10 years, how do we do? Well, you can see here that we achieve top quintile ROE performance with volatility that approximates the average of the industry of our peer group. When you look at the Bermuda hybrid companies alone, you can see that we actually delivered top performance with less than average volatility.
Some of these statistics might surprise some of you because I know that our results in the last few years have been marred by the occasional large losses, most of those stemming for some of the business that we wrote in our early years. It's undeniable that even including all of those events, our top performance is still there to be seen. Some of the changes that we're putting in place in portfolio construction and risk management are specifically targeted at reducing the incidence of these unusual large loss events. I'm very confident that putting these in place will improve the quality of our earnings in the years to come. This is again a similar chart, but here we are measuring underwriting profitability or the net underwriting margin.
In this case, I think it's very clear that AXIS has the best underwriting performance in the peer group. It's because we have, in my mind, one of the best underwriting teams in the industry. We have a great book of business focused on specialty lines and a broad geographic spread of our business. I'm sure there's not much that I can add to this slide. I think it speaks for itself, and my colleagues will give you more details about the kinds of strategies that they've put in place to achieve these results. What I can say is that at the core, we have a broad pool of underwriting talent with a depth of skills and relationships with producers and clients that few can match.
We augment their work with the added input of transactional and portfolio peer review, so we can have the benefit of collective insight of the broader team. As you've heard us discuss over the past few months, we intend to supplement that with an even greater focus on portfolio construction to optimize risk-adjusted returns. We believe that this combination of skills, insights, and process will drive sustainable superior results for many years to come. I'm fortunate to have a very strong, very experienced, and very stable executive committee, and they're all here today. They are each accomplished professionals in their own right, and their individual and diversified bases of skills and experience complement each other very well. I'm pleased to say that the whole altogether is much stronger than the sum of its parts.
Over the last couple of years, we've also done an excellent job of recruiting superior talent to add to our teams at all levels of the organization. As I've mentioned earlier, we brought on Jay as the new head of the reinsurance business. More recently, we recruited Peter Wilson, previously the head of CNA's $3 billion specialty lines business, to be the president of our U.S. insurance business. Joe Henry replaced me as CFO, and recently, Eric Gieseke joined us as our first-ever group actuary. We've also been very active over the last few years, bringing on experienced teams to establish or grow in attractive lines and markets, including renewable energy, design professionals and architects, primary casualty, agricultural reinsurance, and most recently, weather and commodities markets. Of course, since 2009, we've added 85 professionals to help staff up and build our A&H initiative.
Following our strategic reviews, we've landed on four key imperatives to deliver our intended results. The first is to sustain further development of the people, skills, and culture that have made AXIS the success that it is today. Our success will continue to be based on our team's superior underwriting and service. AXIS will remain a talent magnet that recruits, retains, motivates, and rewards the most talented team in the business. We are creating an environment that empowers talented individuals to execute on their best ideas and recognizes and rewards them for their efforts. We provide them with a platform, a geographic spread, and a capital base that facilitates their success, and culture and an environment that are aligned with their values and aspirations. We will deliver diversified growth, bringing our specialty expertise to new markets via concentric expansion.
We will sustain our entrepreneurial spirit and bring on new teams and new specialty franchises, the result of which will be more opportunity to build a better book of business, a more balanced book of business with less portfolio volatility. We will optimize, within the constraints of market realities, our portfolio's risk-adjusted returns through better use of data and analytics, remembering, of course, that the core of our skill is in the talent and experience of our staff, we will be guided, informed, but not ruled by the models. Finally, we will pursue operational excellence with an effective and efficient organizational structure, IT systems, and competitive expense base. To conclude my part of the presentation, AXIS has all of the attributes to deliver on its quality, sustainability, and profitability goals.
Our track record of superior underwriting and strong value creation has been delivered by a deep bench of talent led by a stable and highly experienced leadership team. We are singularly focused on executing the strategic initiatives that will deliver top-ranked risk-adjusted returns for the benefit of our shareholders. At this point, I'll pass the podium to Jay. Jay?
Thank you, Albert, and good afternoon, everyone. Thanks for showing up on such a beautiful day. I'm Jay Nichols. I've been with AXIS about a year, and what a year it's been. We've had a lot of change in the reinsurance space, and I think we've made a lot of progress. I'm really proud of what we've accomplished. I'm really proud of where we are and where we're heading. I'll go through a lot of it today and try to get it to how we're going to accomplish the goals that we have in the future. As Albert mentioned, I'm going to have two of my teammates give case studies. Bill Fisher, our Chief Underwriting Officer, is going to talk about portfolio construction, and Stephan Knipper, who is the President and heads up our European operation, is going to talk about credit and surety and cycle management.
Today I'm going to give you an overview of AXIS Re, talk about underwriting excellence at AXIS Re. I'm going to give you some insights into my brain and how I think about strategic approach to reinsurance. I'll give you an overview of centers of excellence. We've actually shifted to have a product line focus as well as a regional focus at AXIS Re, and we've introduced four centers of excellence and leaders to lead those centers of excellence. We've had significant new initiatives within the reinsurance space, and I'll give you some updates on those. At AXIS Re, we're a diversified global reinsurer. We're very well-positioned for the way the world's going. We've evolved from a monoline company in the beginning to a company that has an enviable portfolio of products to deliver to their customers.
We've delivered superior results as evidenced by our $1.6 billion of underwriting profit and an 89% combined ratio over that time. On the right side of the chart, you can see a pie graph that talks about our 2012 portfolio. Six lines of business make up 10% or more of the portfolio, showing the strength of our diversification. At AXIS Re on this chart, we're depicting that AXIS Re has outperformed from an underwriting profit measure the average of the peers, and we're in the far left side of the whole universe of our peer universe. We've outperformed the average of the peer universe by 700 basis points from the timeframe 2003 to 2012. On this chart, we then risk adjust those returns on annual volatility using a Sharpe ratio.
The returns that we have, given the volatility, are still very attractive in the industry and in the diversified specialist category, we're very close to the top of our peer group. Also on this chart, we have depicted the generalist on the bottom left side, which has low volatility and lower returns, and what I call the specialists, which are mostly the property cat companies, and those guys have higher returns and higher volatility. As you saw on the other chart, they were ahead of us in returns, too. Our goal at AXIS, and you'll see some of the initiatives we're putting in place, is to move that positioning on that chart up and to the left to become a stronger, more diversified specialist over time. Here's the time you get inside my head. It's a real exciting time in the market.
It's a real exciting time at AXIS Re as well. I think all the changes that are going on in the industry are right in our wheelhouse in terms of whether it's the skills that I bring, the skills that we have, or the skills we're developing at AXIS Re. This cube is a multidimensional look at the things you have to do well to win in the reinsurance business. My view is you have to have the products and the focus on products. We have Agriculture, which we've developed as a franchise this year, credit and surety, casualty and property, and we have franchises in each of those four product offerings. We also have a geographic platform that allows us to distribute our products globally. We have a strong presence in Latin America, in Asia Pacific, in the U.S., and Europe.
The third dimension on this cube, which we haven't spent as much time in the past, but we will in the future, is this dimension of capital. Introducing third-party capital, dynamic hedging of our portfolio, and the utilization of retro to deliver lower cost of capital to our customers. This is becoming ever more important, and I'll talk about it a little bit later. For now, we have hired Ben Rubin, who is here and is available. Stand up, Ben. Stand up, Ben. Ben's what I refer to as a stalkee. I stalk really talented folks in the business and talk to them for long enough to convince them to join me, and I'm really excited to have Ben on board. I've worked with Ben for a long time.
We've executed successfully on many transactions, as we enter the third-party capital space, I wanted to make sure that we had the right person for the firm and for the opportunity, Ben's absolutely the right person. Steve was asking me at the party, what's the how? The how here in my mind, there's an element of how, which is the position you have, which is the position of your products, the positioning of your products, the positioning of your geography, and how you access the capital. The second part of the how is execution, and execution comes down to people. The reinsurance business and the third-party capital business as well, which we're starting, but it's all people doing business with people. As you can see on this slide, we have great people.
The average is two-plus decades of experience, I believe that as of now, we have the right people in the right place doing the right things at the right time. We are very well integrated globally as a result of the integration of products across the globe, I'm very happy with the team we've got, it's been a phenomenal experience for me in the first year to work with these guys and girls. Our global platform, we have underwriting hubs in New York, Bermuda, Zurich, and Singapore. We just added Singapore as an underwriting hub. We had had it as a marketing office for a long time. It's worked out phenomenally well. We have Rich Milner in Singapore. Being in the same time zone as your customers is a phenomenal benefit and has given us access to more business.
Actually in a market where they have differentiated pricing across all layers has allowed us to get better pricing. It allows us to service, understand, and react to all of the unique elements of those jurisdictions. This chart talks about our global centers of excellence. I talked about our product line focus. In the inner side of this wheel are the four global centers of excellence that we've developed. They've existed, we've developed them over the last 12 years, we now have product line leaders for property. We have a product line leader for credit and surety. We have a product line leader for casualty and a product line leader for agriculture. That is the person who makes sure that the delivery of those products across the globe is consistent and that we can serve our customers with the entire product offering.
To be a true center of excellence, we've identified these attributes. In our minds, you have to have the best underwriters with the best customers, offering the best products, and executing with a regional presence on a global basis and with the best decision support systems. When we enter a new product line, when we're developing a new product, or in the product lines we're in now, this is the aspiration that we're shooting for to make sure that that business is a franchise and is sustainable, and that we can lead in that business. It also allows us to be consultative with our clients and to be consistent support because we understand the risk that we're taking. Behind these 4 centers of excellence, we have what I refer to as 15 franchise businesses.
The unique thing about AXIS is, even though we're a big company, and the reinsurance company is a very sizable entity, as well as AXIS in its entirety is a very sizable company, we treat these as small businesses operating within a big platform. We have the focus of the small businesses. We have individual teams for each of these product lines, and we have the focus of a small company with the platform of a large company. In May, in anticipation of the drought in the U.S. I'm just kidding. I didn't really anticipate it. I hired Peter Griffin. It was probably the first thing I did when I showed up at AXIS. We hired Pete Griffin, who I had worked with for a long time and know very well.
A very talented guy in the agricultural space. You've heard about this, our development of the agricultural business. We immediately got on the road, developed customer and distribution relationships, and solidified our access to product. We introduced products globally and expanded our product offering, and then built proprietary decision support systems, ran it through the risk management systems of the firm with Mike, and emerged with what I would refer to as an instant franchise. Obviously, lots of work, lots of effort, but it was a great opportunity in the U.S. because of the dislocation, and I'm very happy with this fourth center of excellence. This chart just shows you the opportunity in agriculture. We've been more focused in the U.S., so our product is more deployed in the U.S. and Canada.
Each one of these jurisdictions, there's a unique combination of governmental and private market solutions that are very complex. The underlying math, the underlying data, and the underlying interests are so specialized that you really have to have somebody who knows what they're doing. This can't be a part-time job. Like David Letterman says, "You can't do this at home. You'll get hurt." I think we've got the right team, and we're expanding that team as well. Another new opportunity, we just this week announced that we hired 2 guys on the weather and commodity market side to bring weather and commodity risk transfer products to end users in the energy, agriculture, and other industrial spaces. This is a real specialty market. I was very involved in it in my prior life. These guys are very well known to myself and a few other people in the firm.
We had ongoing discussions with them for a while, and we're very happy that they've decided to join us. A great growth opportunity for us, and this business is very complementary with our agricultural business as well as our cat business. We will be delivering products both in reinsurance insurance and financial products form. A large percentage of this is in derivative form of this business, but it's a great product leveraging our weather capabilities. In one of the slides before on the agricultural side, we've engaged and started what I refer to as the Axis Research Park with a major university to get access to weather information and research information, including hurricane and tornado science and technology, which I think will help us across all our lines of business. In the weather and commodity markets, we're going to be focused on more weather contingent products and outage products.
We're not going to be a pure speculator. We're going to be providing what I refer to as risk transfer products that look like insurance. Maybe not in the insurance or reinsurance form, but look like insurance or reinsurance. We will be using exchanges to dynamically hedge these portfolios where we can, but it's not a trading business per se. On third-party capital, as I mentioned, I hired Ben. Well, Ben decided to join us is more the frame. I think this is a great opportunity for us to leverage our platform. We have great capabilities in the agricultural space and in the property space.
I've had discussions with capital markets folks ever since I joined, and I believe that there are a lot of capital markets folks who we could engage with to extend our franchise dramatically, serve our customers better with larger line sizes, collect fee income for doing this. I see it as a real triple win where our customers win, we win, and the capital markets participants win by going through ourselves as the arbiter of where risk meets capital. I have always said this, and I'll repeat it again, is that I believe the reinsurance company should be the arbiter of where risk meets capital, and I believe that we should position ourselves at AXIS, and we will, to be the arbiter of where risk meets capital in the insurance and reinsurance world broadly.
With that, I am going to introduce Bill Fischer, who's well known to all of you, and he's going to spend a few minutes talking about portfolio construction.
Good afternoon. Nice to see so many familiar faces. I have a couple questions from the people that have met me over the last 12 years in Bermuda. First, this tie is only on because they made me put it on to come into Metropolitan Club. Yes, I have socks on, and no, I don't have a pair of red shorts underneath the suit. It's really my pleasure to be the longest standing member of AXIS. I've been here, I think actually before there was money in the bank. I fondly remember the day it was deposited. It's been a great ride since then. I'm personally very excited having the opportunity to work with Albert and Jay. Jay, I'm not fully inside of his brain yet, but I'm mostly there. He's got a lot of energy and has really revitalized the reinsurance business. It's been a lot of fun.
All the new initiatives are bringing that fun back to the business. It's exciting, and a lot of learning for me and for others. It's a wonderful experience at the moment. As many of you know, our DNA, as a company and in the reinsurance business as well as the insurance business, is individual transactional underwriting. We're excellent at it. We have a wonderful team of underwriters supported by a very talented and commercial team of actuaries and analysts. We spent the first eight years using that platform to build relationships with a number of customers around the globe. We're spending time today, and really the most recent year and a half or so, is building portfolio approaches to many of those lines of business.
We're trying to do that to make sure that the overall portfolio is as profitable as it can be at any point in time. That includes not just the reinsurance business, but together with the other businesses that will be represented by my colleagues. How do we do that? Well, first, the starting point is to just look at the traditional approach to the business, the transactional approach to the business. We have a very experienced group of individuals on all the underwriting teams, and they're using traditional actuarial and modeling techniques to come up with the best pool of risks that we can source out of the global reinsurance space. Then we're overlaying on that a variety of different portfolio tools. Michael will mention later the group capital model.
That's probably the biggest and most sophisticated tool that we have, but we have tools that reach down into distributions across all lines of business. Probabilistic tools that inform us about the margin in an individual transaction or an individual territory at different return periods. Tools that look at standalone returns on individual portfolio. Again, perhaps in a specific territory, a specific product. In the property space, we obviously look at that both on an occurrence and an aggregate basis. We also have deterministic tools, and by that I mean a number of events that are probably, I would describe them as being more tangible, more understandable than a distribution coming out of a statistical model. We have historical events that are things that have really happened, whether they happened in property space, so Hurricane Andrew once again running through our portfolio.
Whether they happened in credit and capital space. How does our D&O portfolio get affected by another 2008? How does it get affected by another 1930? We have hypothetical events in our quiver of deterministic events, those are events that maybe haven't happened, but we think they're possible to happen, those are things we want to understand how our portfolio is going to respond to. In particular, around lines of business that are not property, I think those are critical to have and to test yourself against those. Then that really sort of fits in with the custom events as well, those custom events are, again, geared around lines of business that probably don't have the same statistical science around portfolio approach and need to be tested in different ways.
We throw those custom events against our portfolio as well to make sure that it responds in a way that we think is reasonable. Of course, we look at volatility. In the property space, we start there by looking at values in force. We look at individual portfolios or territories. We map those values in force to allow the underwriters to visualize what we're exposing ourselves to in a given territory, in a given transaction, or whatever we might be looking at a point in time. We overlay on top of that limits oriented view of the world. How big do we want to expose ourselves maybe on a given transaction? How much limit do we want to put out? It might be how much exposure do we want to a specific territory and a specific peril in the aggregate?
It could be how much do we want exposed to an individual contractor in the surety space? We look at the limits that we're overlaying, we do that again on all the lines of business that we write, not just property. We approach that exposure base from a PML perspective. As I said a couple times earlier today to some of you, PML is a term that I really hate the way it's used. It's tossed around freely as though it means one thing, it doesn't mean one thing. It means something different in each line of business. It often has a statistical basis to it, particularly in the property lines.
In many other lines of business, it's a very judgmental view of the expected return period of certain types of events or probability of having a loss on a specific type of contract. We take a lot of time looking at PMLs and measuring those against values in force and against limits, just to make sure that we're sanity checking and triangulating as best we can how we're measuring risk and the potential volatility coming out of that risk for a given portfolio. I'm going to give you a little example of something that is also a focus of ours, that's looking at the market share that we might have to a given event. The easiest way, probably another really tangible way of looking at it is on the property side.
This is an exhibit that comes up in front of the underwriters on the property side. It's a distribution of our returns versus industry returns in a given region and peril zone. I've sort of neutered it, so you can't really tell exactly what it is. It's important to us and why it's important for a couple of reasons. Well, one, to have a sound portfolio, we have to be pretty focused on the constraints that exist in that portfolio, and some of those constraints are around limits. We want to be very conscious of shares that we have. We look at this, and in particular, on the more volatile lines like property, to make sure that we're going to live within those constraints as best as we can analyze it through the tools that we have.
It's also important because the other side of that is not just what are the limits we have, but are we being paid well enough in a specific territory for a specific peril, or it might be in a different line of business for the risk that we're taking. I think that's probably as critical as the first. I mean, we're very focused on being paid for the risk that we're taking and also doing that within the bounds that we've built for ourselves around the risk that we're willing to take. This is a typical tool. We have many tools around portfolio analysis that exist within the underwriters' work screens that they see when they're analyzing a given account, or maybe on the casualty side, more likely discussing an account with the pricing actuary. That's really it. That's the conclusion of my remarks.
I'd like to turn it over to Stephan Knipper. Stephan is the President and Chief Underwriting Officer of our operations.
Thank you, Bill, and good afternoon, everybody. My name is Stephan Knipper. I'm the President and Chief Underwriting Officer of AXIS Re Europe. I'm with AXIS since the very start of AXIS Re Europe in Zurich 10 years ago. Let's talk about trade credit and bond. AXIS Re has a lead position in trade credit and surety, an important specialist market. As you can see from the slide, the size of the trade credit and the surety market is about $19 billion, of which 30% is reinsured. It's an important reinsurance market with nearly $6 billion of volume. Reinsurance is mainly bought on quota share basis. What does that mean? That means there's a strong alignment of interests between the parties, between the cedant and the reinsurer. The main products are trade credit insurance, covering the non-payment risks of buyers of goods and services.
This product is a short-tail product. The payment terms on average are 90 days. We're really in the short-tail space here. Surety. An insurance contract guaranteeing fulfillment of contractual, legal, or regulatory obligation. These are mainly construction-related bonds, but it could also be other types of bonds like custom bonds or court bonds. The average tenure here is two to three years, but we have bonds with tenures of five years and longer. With our experienced team and our market presence, we are a leader in this growing specialist market. The trade credit industry has a proven track record of managing the cycle. When you look at the slide, the bars show the insolvency index from 2001 to 2011, with the year 2000 representing 100. The red line shows the trade credit industry loss ratio.
These numbers, I have to state, are on fiscal year basis and include the run-off of prior years. What you see is a big improvement of loss ratios in the years 2002 and 2010 respectively, despite very high insolvency ratios. Trade credit insurers can detach themselves from insolvency development after the first phase of the cycle through dynamic management. In case of an adverse development of a buyer risk, the credit insurer can cut or even totally cancel the credit limit for the next shipment of goods already. After the 2008, 2009 crisis, the loss ratio is even lower than after the 2000, 2001 crisis. This shows the improved capability of the industry in respect of policy and risk management through better analytics and clearly better execution on the risk management. This business is a specialist business for people with the ability to successfully manage the cycle through risk underwriting.
Let's have a look at AXIS Re in this market. AXIS Re has outperformed the credit and bond market. The graph you see here shows the gross written premium and the loss ratios for the whole credit and bond book of AXIS Re. These loss ratios can't be compared to the ones you saw on the prior slide. The slide before showed trade credit industry losses for insurance and reinsurance markets on a fiscal year basis. What you see here on this slide shows AXIS Re numbers for trade credit, as well as surety bond business on accident year basis. Over the years, the book shows very strong results. After a difficult 2008, we benefited from the dislocation of the market and improved our market position in the credit business as well as in the surety business with improved terms.
Currently, you see a moderate uplift in claims frequency and a slight increase in the size of claims. This is reflected in our conservative reserving approach. To further outperform the market, we put the emphasis on client selection and underwriting discipline. We believe that at AXIS Re we are well positioned to benefit from a growing trade credit environment. We see a big increase in global trade flows with the Asian and the Latin American markets gaining importance. We follow this trend very carefully and are confident to improve our market position to actively pursue opportunities in emerging markets. As I can tell you, we have benefited from this proactive credit and bond strategy in the past already. This is what attracted us. The very positive performance of the Latin American surety market, technical results above 30%.
This business is mainly local business. We needed local expertise for that. What we did, we hired a Latin American market specialist for this business and started writing it in 2009. Great success. Selective number of clients in core markets. To conclude my case study, the key success factor for trade credit underwriting is dynamic cycle management. The key success factors for surety are product discipline, solid technical and financial underwriting. This takes a specialist and a leader. With our experience, our strict client selection and underwriting process, now standing in the market, we are confident to benefit strongly from growing trade credit and surety markets. With that, I'd like to hand back to Jay Nichols.
I'm going to end very quickly. I just want to flip to the next slide. Based on the slide, I got to tell you, I'm loving what I'm doing. I'm loving our position on the three dimensions of product, geography, and capital access. I love our people. I think we've done a great job at executing in my first year. The support from the firm and from the markets has been phenomenal. I'm extremely excited about our future in what is a very changing environment. I'm very happy with where we're positioned on the three dimensions that I think is the how of how we succeed. With that, I'm going to introduce my partner, Jack. Jack Gressier, who runs the insurance.
Thank you, Jay. Good afternoon, everybody. As Jay said, I'm Jack Gressier. I'm the CEO of AXIS Insurance, and I've been with the company since April 2002. That would help. As we go through the presentation, I'm going to give you an overview of AXIS Insurance, a perspective of our underwriting excellence, an overview of some of the strategic initiatives we're involved with at the moment to develop the platform. Give you an idea of the breadth of the AXIS Insurance franchise, how we've demonstrated our ability to execute. Two of my colleagues, Joe England, that Albert mentioned earlier, who's the CEO of AXIS Specialty Europe. Tim Cavallo, who's the president of AXIS Pro in the U.S., will give to you some case studies later as to how we implement and the client relationships and bring on board new businesses.
We'll hand over to Chris DiSipio, who'll give you an overview of our accident and health business. First and foremost, it's important to understand that AXIS Insurance is a diversified global specialist insurer with a very strong record for profitability through the cycle. As you can see from the chart, we produced an 83% aggregate combined ratio from 2002 to 2012, so pretty much inception to date. It's only possible to achieve that kind of performance, obviously, if you've got extremely strong people, a very broad range of product, and a very strong geographic platform on which to build. We'll talk more about that as we go through the presentation. As I said, we have a strategic global presence. We have over 700 people in eight countries, organized into five major geographical groups.
These groups provide us with the perfect geographical platform to deliver our very diverse range of retail, wholesale specialty products to the global marketplace. Combination of retail presence in the North American marketplace, Canada and the U.S., then very strong wholesale hubs in London, Singapore, and Bermuda. Underwriting has been absolutely critical, we have outperformed our specialty peers from inception to date. Critical point about this is that it all hinges upon, it's all built on the foundation of risk selection of the highest quality. That is underpinned by the peer review environment that we have in place and have done since our inception, which is unique in that it takes place prior to the acceptance of any risk. As you can see from the slide, it doesn't take much elaboration.
Across every sector, the U.S. specialty, Bermuda scale, Bermuda scale, across that period of time, we've outperformed by a considerable margin. Again, that's a demonstration of the quality of the people, breadth of the product, and the diversity of the product and geography that we have. As you can see on a risk-adjusted basis, similar exhibits to that that Jay showed you earlier, adjusted for volatility. Our returns, yes, of course, they're superior to all of our peers, but somewhat more volatile perhaps than not quite all of the rest of the pack. I think it's certainly safe to say that at that level, we have been rewarded for that volatility when you look at the underwriting profitability. Just to provide some context around that volatility. In that period of time from 2003 to 2012, there has not been a single year with an underwriting loss.
I think that's very important to remember to provide a backdrop to that volatility. Obviously, as I said, it's been a very profitable platform. That profitability, though, hasn't been confined to any particular period of our history. This chart comes from Dowling Research, you can see that in the last three years, or 2010 to 2012, taking a three-year average insurance ex cat accident year combined ratio, we considerably outperformed most of the companies within our close peer group. We're comfortably sitting there at a 92% combined ratio, whereas most of the others are barely break even or worse. Probably important to stress around looking at this particularly, is that our platform is very well developed in the U.S., very well developed internationally.
Most of those other competitors on that chart have been somewhat less successful, perhaps developing their London platform or perhaps developing their U.S. platform. None of them have managed to achieve both of those or on a profitable basis. If you compare it to the London peers, most of those haven't been able to successfully build U.S. platforms. Probably also important to stress at this stage that that 92% combined ratio on that basis has been achieved across this period of time while carrying at least an extra couple of points of drag related to investment in new initiatives. I'll talk to you about some of those other initiatives a little bit later. We're a sustainable, differentiated insurance franchise, very strong leadership, exceptional talent through the business, significant scale and diversity, certainly in terms of the breadth of geography and the people that we have.
That's positioned us very well to survive the cycle, to digest volatility, and to manage the cycle without sacrificing the scale that we've built up through that period of time. We're very organized to meet customer needs. My colleague, Joe England, will talk to you about how we manage the service and deal with major global customers across our organization. We have a very strong U.S. platform selling a diverse range of retail, wholesale P&C products. Our international platform similarly so. A professional alliance platform that has a broad international and U.S. base. This is supplemented by our Capital Risk Solutions division, which provides political and credit policies. Of course, as Chris DiSipio will talk to you about later, our Accident & Health division. We have a very strong leadership team.
Of course, none of this is possible if you don't have very good people about you. Unlike Jay, I have not stalked any of them. A number of them I have worked with for a very long period of time. We're fortunate enough to have been able to supplement those in recent times with some exceptionally strong hires. It's important to stress that across this management team that I work with every day, the 27 years of average industry experience, six of which are at AXIS. Across our 75 senior underwriters through our insurance operation, and that's in every part of the world, the people that run all of those business units who are responsible for setting the underwriting strategies within them, an average experience of 24 years and seven years at AXIS.
A very strong bedrock on which we've built the underwriting business that we run today, and that's particularly critical. It's all about the people. Just talking a little bit about some of the strategic initiatives that we are implementing at the moment to deliver diversified growth. I'm not going to talk about all of these because, as you'll see, there's rather a lot of them. They cover existing products, new products, new geography, new distribution, and some of them within our existing distribution. There's 16 new initiatives here, as I say, I won't talk about each and every one of them individually. I'll just give you a flavor for the type of initiative that we have going on and how we're approaching them. Asia Marine, as an example.
We, for a long time, in fact, since the inception of the company, have had a very strong marine operation based out of our London market platform, specializing in offshore energy, marine cargo, marine hull, recreational marine, a whole host of marine products, P&I, and pollution. We recognize that there are opportunities in other marketplaces throughout the world, potentially to expand and to distribute and to export that product expertise to them. We were looking at the Asian marketplace via our Singapore hub. We didn't currently offer any products in that market. We carried out a very extensive analysis to determine whether it made sense to. Of course, in most cases, it certainly didn't.
I can quite safely say that the offshore energy market and the marine hull market in the Singapore and the Asian market are probably the most overserved in terms of international capacity and local capacity in terms of marketplaces that you could find. We did find some areas of high specialism that require high expertise, marine cargo, and specie business, fine art business, that are very underserved in terms of that marketplace. We took someone with considerable expertise in that market, transferred them from our London platform, and again, embedded them within the Singapore environment. Using the support and expertise and product expertise and development from our London platform, and then the peer review to support that operation, we've established and started a small at the moment, but strong in terms of skill set, marine operation in Asia. A similar type of development.
We've always had some very strong international property capability, again, in our London platform. It's a wholesale market. It attracts international business, highly specialized business from all over the world. After the cats of 2011 in Japan and Thailand and New Zealand and so on, we saw considerable opportunity, as prices increased, to broaden the product offering we had in that marketplace. We couldn't just do it from our London platform. Today, not all business flows to London. Some of it stays in the domestic markets. We have operations in Australia, we have them in Canada, we have them in Singapore. We took the approach of taking some of our existing operations, supplementing them with additional property underwriters, in all cases, from the region itself, and we set up a new property operation in Singapore at that stage.
Using, again, the expertise, the support, and then the peer review to maintain a common and consistent AXIS approach across the organization. We established and set up three new and stronger property operations in the local markets to supplement the product offering we have in the international product offering we have in our London market platform. Just to give you an idea, and of course, we're not in the habit of giving guidance. It's difficult to know what market conditions will do over this period of time. There's no reason to believe that across a five-year period, that across these major initiatives, and of course, you can see further up there, you can see that there's a very diverse range of new opportunities. We believe we could generate in excess of $1 billion, given the right market conditions from these initiatives alone over the next five years.
Where is AXIS going? The same chart again, as you can see, just to remind you, very strong underwriting profitability, perhaps a little bit more volatility than most of the rest of the pack, but not all of them. With the new initiatives we have in place, approaching them in the way that we've implemented and developed all of the other operations that we have on board, we absolutely believe that we can dampen that volatility that we've exhibited to date, but of course, maintaining that industry-leading profitability. We believe we can do that. Just to give you a little bit more perspective about some aspects of the platform, we're very well positioned in the international marketplace. Of course, London Market specialty business was the origin of the AXIS Insurance business. It's where we've been particularly strong or were particularly strong at the outset.
As you can see, a very diverse range of different products, highly specialized, terrorism, aviation, war, energy business, marine, and so on. Also a well-developed international P&C platform that we support, whether we underwrite from London, but also via the rest of our international operation in Asia and Australia, Canada, and so on. This gives us a great opportunity to continue to export that product expertise into new and emerging markets in different parts of the world, and we are very well set to do that. We have a very strong presence in North America. If you go back to the beginning of our U.S. platform over 10 years ago now, it started with very much a core presence in the U.S. E&S marketplace, property and casualty products. Today, it is considerably broadened. We now have 12 offices. We have an office in Toronto.
You can see from the product listing on the side there, a significantly broader array of products that we sell in that marketplace. We've broadened the geographic footprint. We've broadened the product diversity. Our distribution has changed significantly. It's no longer concentrated in the wholesale markets as it used to be. We have a significantly larger presence within the retail sector, and you'll see that as a continuing theme. This platform alone, again, to demonstrate the success I was talking about across multiple different parts of our operation generates in excess of $1.2 billion of gross premium and still presents considerable opportunities for growth. Just to further illustrate the point about the expanding distribution, you can see from 2004 to 2012, a greater shift into the retail business. That's as we've sold more property products and certainly more professional lines products in that marketplace.
Less of a focus on the wholesale marketplace. That's illustrated by that increase in distribution relationships from just under 200 of them to approaching 900. I think you'll continue to see that as a continuing theme as we go on to build the business further. We very clearly built a global professional lines franchise from the very beginning in February 2003, when we did the Kemper renewal rights deal, all the way through till today. We've methodically built and invested in, organically grown, and then with some bolt-on acquisitions. You'll hear from Tim Cavallo about Media/Professional Insurance a little bit later, and how we developed that acquisition and built it into the platform. We've opportunistically added to the platform also. Hasn't all been as methodical. For instance, post the credit crisis, there was a huge opportunity in the U.K. PI market, professional indemnity market.
The market suffered loss. A lot of competitors exited the marketplace. Pricing responded significantly. We chose that point to establish and set up our team, writing in excess of $50 million of revenues down on an annual basis and set up post the financial crisis. As you can see, an organic approach, bolt-on acquisitions, but carefully over time. We've been able to create, as a result, a very significant global platform. Six key hubs for this class of business. A very diverse range of products within all of them. Important to stress, also, primary and leadership capabilities in all of these areas across most of these lines. What that's enabled us to achieve in terms of our total global professional lines operation from 2006 to 2012, compounded annual growth of 9.2%. Not just from one area or one or two areas.
The growth comes from across the platform. Multiple different products have grown and geographies, but particularly focused in the global professional liability arena, particularly outside the U.S. Of course, again, coming back to the people, you can't do any of this without an exceptional management team. We're fortunate enough to have a very strong team in place. Quite a number of people have been with us for a very long period of time. An average industry management experience of 19 years, including six at AXIS. A total team of 205 people. I think it's important to stress in all these cases, it takes very solid teams of people to achieve any of this, to develop, build the products, to sell them, to understand them, and of clients. Capital Risk Solutions is the home of our political risk and credit business. Currently constitutes 1.7% of our gross written premium.
Also we believe it to be a very strong differentiating part of our portfolio that provides strong diversification. It's delivered a 56.3% loss ratio from inception to date. Of course, you can see that spike there back in 2009 from the credit crisis. We learned a lot of lessons from the credit crisis. I think a lot of people did in a lot of different industries. Certainly, we've incorporated a number of the lessons that we learned into our portfolio. We have a much stronger alignment of interest between ourselves and the client base, more robust limit management, and a more balanced portfolio construction. We enforce the standard AXIS contract wording and have more independent risk analysis. Of course, very strong continued and enhanced monitoring of the ongoing portfolio.
Since the credit crisis, as a result of the implementation of a number of those initiatives, we've reduced the overall exposure and the average limits that we're exposed to by quite a considerable amount, as you can see. The portfolio as it stands today is probably of a higher credit quality, as you can see from those ratings. Strong portfolio distribution by product type. It also, as a result, provides us with attractive and diversifying macroeconomic risk. We have a strong diversity across our obligor profile and also the regional profile presents, again, very strong diversifying risk with a very low correlation to our broader P&C portfolio. I'll now hand over to Tim Cavallo, as I said, the President of AXIS Pro, to take you through our first case study.
Thanks, Jack, and good afternoon, everyone. My name is Tim Cavallo, and I'm the manager of AXIS Pro. My group underwrites commercial E&O here in the U.S., which comprises our media, miscellaneous professional liability, tech, and Cyber products. Today, I'm going to speak about the acquisition of Media/Pro in 2007, and how we took the strength of AXIS to make the franchise even better. Media/Pro presented AXIS with a tremendous opportunity, including the 28-year history of quality underwriting and claims handling in the commercial E&O space. Media/Pro is the leading writer of media insurance in the world, with a strong history in miscellaneous professional liability, tech, and Cyber insurance. Media/Pro also presented AXIS with a quality portfolio of small account business. This business tends to be more profitable and less volatile than some of the larger account business.
In 2007, the question became, how do we take this incredible franchise and make it even better using the strength of AXIS? These strengths were many. Strong local offices throughout the U.S., amazing controls and processes around individual account underwriting and portfolio management, a willingness to invest in people and technology in order to be the best, and strong relationships with national brokers. We took those strengths and over the past six years have taken this franchise to a higher level. We took advantage of the local AXIS offices and moved over half of our underwriters so that they could be closer to our client brokers and insurers. This has resulted in increases, submissions, and overall premium. We invested in a new system that increased our operational efficiency. We've accomplished the foregoing increase in premium and submissions with slightly fewer underwriters.
One of the huge benefits of Media/Pro was its 28-year history of data around premium and losses. We've been able to use that data to improve profitability and create a portfolio that is incredibly responsive to changes in exposures in the marketplace. Our investment in people has led to substantially enhanced capabilities generally, but particularly in the tech and Cyber area. This investment in people has also led to better capabilities on large national accounts, which have complemented our strength on these accounts in other lines. Lastly, the Media/Pro acquisition was the launchpad for other opportunities around the world. The Media/Pro operation in Canada was the starting point for AXIS's current Canadian operation. The Media/Pro team in London was integrated with the AXIS London operation to become the beginning of our E&O franchise there.
We've also been able to take our expertise in the U.S. and distribute it around the world. For example, our media expertise was used to help develop and launch a media product in Australia. The MediaPro acquisition is a great example of taking a fabulous franchise to the next level for the benefit of AXIS globally. Thank you. I would like to introduce my colleague, Joseph England, for the next case study.
Good afternoon. My name is Joseph England. I'm Executive Vice President of AXIS Insurance, responsible for our marine business and also legal entity responsibility as Chief Executive of our European insurance company based in both Dublin and London, and this will be my 10th year with AXIS. The second case study concerns one of our major client relationships and represents a good example of how we coordinate underwriting across the group. It's not about cross-selling, which I'll take as read, but it is about culture, communication, and underwriting focus. This example is typical of the major customer's insurance demands. That is multiple products, multiple markets, requiring multiple insurers. In this case, we're offering several very diverse products from several underwriting offices. This relationship has grown over the years, delivering $137 million in gross premiums to AXIS since 2002.
We've chosen to organize ourselves around the principal international market hubs to give us the presence and access we need. In this example, the property placement is in the U.S., Bermuda, and London markets. One market may concentrate on primary risk, another on excess cat, another on filling capacity in between. All international insurers have large customers like this. The key distinction is that our underwriters are not only in the right places, but they deliver a consistent message from AXIS. That may seem obvious, but all too often we see companies not only not communicating internally, but actively competing against themselves. Our approach isn't parochial. Our property underwriters in the U.S., Bermuda, and London hold a weekly conference call to coordinate terms and responses with a broader and better-informed perspective.
This is underpinned by our peer review, which is deeply embedded in our culture and importantly takes place pre-risk acceptance. It takes place on a daily basis between senior underwriters in different locations, essentially helps deliver optimum performance to AXIS across different markets. This is just one of many examples that reflects how we harness our network to access and build serious long-term relationships, yet also remain nimble enough to execute more focused, flexible, informed, and ultimately better responses than our peers. This is the third case study today, which concerns the development of our energy business into renewables and further emphasizes our underwriting focus. The first slide illustrates the landscape of the traditional energy sector.
We've already built a substantial energy business concentrating on our preferred areas at the upstream or offshore energy sector to the left of the slide, through to the downstream or onshore energy sector to the right of the slide. It was a natural development of this business to extend the emerging renewable energy sector to fully complement our products offerings. First, the opportunity. I suspect everyone will be familiar with the growth in the renewable sector driven by environmental concerns, depletion of fossil fuels, and governmental imperatives. Timing was very important in converting what was a clearly emerging market opportunity into a practical business case. We had many opportunities to enter this sector over the years, but decided not to for a number of reasons, not least due to loss experience on a lot of prototypical equipment in the early days.
It's a wide-ranging subject, including the not-so-new, such as hydro, experimental initiatives harvesting wave or tidal energy, through to geothermal systems and biofuels. Our focus is wind and solar. Both emerged with well-developed technology and tried-and-tested project development. There's a limited number of insurers in the space, and the business opportunity for both construction and operational risk now exists to generate sufficient critical mass and deliver a balanced insurance portfolio. Second, leveraging our strengths. We've already built a substantial energy business with a strong reputation and market position for both underwriting and claims. This provides us with the credentials to extend our products offering with renewables to establish AXIS's lead position in the sector. Third, the solution. Specialist risks require specialist underwriters. We hired an experienced underwriting team to focus on developing our wind and solar business. It's proved a success, delivering $47 million in premiums last year.
The third slide illustrates our position and perspective on the energy sector today. To the right of the slide, we show where we have a strong market position. That's deliberately geared to those areas which we feel deliver the best performance opportunity. The top half of the slide shows the areas affording growth potential. In summary, we're already strong in the areas that we want to be and are well-positioned for the future growth areas we want. This is a good opportunity to derive significant, sustainable, and balanced growth, highly complementary to our current energy business and our alignment with the future of the energy sector. With that, back to Jack.
Thank you, Joe. Thank you. As you can see, I think we've demonstrated we certainly have created a sustainable, global, profitable specialty insurer, underpinned by extremely strong underwriting excellence with a very heavy focus on risk-adjusted returns and a proven ability to deliver complementary diversifying growth. As we take the standard AXIS approach, our proven approach to implementing and developing these new initiatives that we've established, we absolutely will dampen the volatility of the portfolio and continue to develop and produce industry-leading profitability. Thank you very much, I will hand over to Chris DiSipio. Thank you.
Hey, good afternoon, everyone. My name is Chris DiSipio, I'm responsible for the Accident & Health initiative at AXIS. Those of you who are familiar with A&H know that every company defines it a little bit differently. I'm going to walk you through our strategy, also try to give you some perspective about what the rest of the market is doing so you have some comparison. My first meeting with AXIS was on the day that AIG imploded. When we talked about whether some opportunities, considering they were the largest A&H underwriter in the world at the time, whether there'd be some opportunities for a new entrant into the marketplace, I was pretty confident that it was. I joined the company in 2009. Had a one-year sit out. We spent the first year organizing ourselves around getting our regulatory approvals.
For reference, using U.S. as an example, we have to get 50 states to approve our products and pricing. That's about a two to three-year process to get an insurance business up and running. We've largely done that now. Consequently, in 2010, we launched our business as a reinsurance business. We obviously had the pedigree of AXIS Re and their reputation in the P&C reinsurance market to establish us doing that. That was opened in Princeton, New Jersey. We started to get some approvals in the second quarter of 2010. As I was able to bring on some former colleagues, we launched our international reinsurance operation later in 2010. Since then, it's been a pretty rapid development of our A&H footprint. We opened our international insurance business in the U.K. That gave us access to the full European market.
We began opening offices on the continent for both insurance and reinsurance in the latter half of 2011 and in 2012. We kept moving further east first, just putting people in our Zurich office to handle Central and Eastern Europe. Then very exciting, opening our first Asian office to handle Asia based in Singapore. At the end of 2012, we finished with $161 million of gross premium. You can't move that fast and far unless you know exactly what you're doing and what market challenges are entailed. I'd point out that the six key people that we had, four of them I've worked with previously. Together, we had done startups in both China, India, and Brazil at prior companies. We knew how to do this and do this pretty rapidly.
There's a name not on this chart that you may have seen a press release about late last week. Rich Phillips, who was former CEO of Munich Re Health for North America, joined us as our reinsurance Chief Underwriting Officer. We're pretty excited about that because he's going to help us get into what we think is a pretty interesting health reinsurance market in the U.S. post-healthcare reform. A lot of opportunities there. We now have 85 AXIS employees around the world in 13 of AXIS' existing locations. I want to talk a little bit about our value proposition and just concentrate on a couple of points. The uniqueness of our strategies starts off with the fact that we are a hybrid. We do insurance and reinsurance. Reinsurance has been extremely important in terms of our development. It has allowed us to move quickly.
It's allowed us to access global markets and different types of risks in those markets, knowing that we had that path on insurance that would take a few years to move us along. I'll move down to product led with a compliance focus. I can't stress how important this has become in our markets. Everyone in this room is familiar with increasing regulation. We've gone from a marketplace, in my view, that has been very much led by marketing and distribution choices around who can really bring product to market fastest with an increasing amount of rules. While we are a commercial business, we do insure individuals. You have this overlay of both commercial and consumer law that makes us much more complex than it used to be. One of the things about AXIS is the first people that I hired were not underwriters.
They were really attorneys, product development people, and people that would help us get through this, especially in the U.S. post-healthcare reform, again, where the rules are still being worked out. We did a tremendous job, I think, of preparing lots of alternatives for what has come out of that. Our products are the freshest thing in the market today. I want to talk a bit about our distribution and our customers. From an insurance perspective, our main customer choice is really to go after employer groups. That's where we sell most of our accident products. From an affinity standpoint, we would call that students, travelers, expatriates, professional associations, anything that has a definable aggregated group, but also has, in our view, specific underwriting characteristics. We do not do mass marketing to the world.
We pick specific industries or specific types of group that have different underwriting characteristics that allow us to select risk. We distribute our insurance business primarily through brokers and managing general agents. 30% of our business today comes through brokers. 70% of it comes through the MGA world. We expect that to start to reverse itself. We have a retail strategy, and we will become more broker-led over the next few years. From a reinsurance perspective, just about every company is a potential ceding to us, we reinsure health companies, P&C companies, and life companies. I did note fronting companies down there because they dominate the MGU space. While these are companies that typically will offer paper to an MGU to write on but don't really take much risk, and really, we do a lot of that business.
We write large quota shares behind some of these fronting companies. The difference is, and this is where we try to use our hybrid advantage, that is our knowledge of the insurance business, we're the people setting the product risk and pricing parameters. We're really in control of what's going on in those things. We don't let the fronting companies do that. We've become an increasingly attractive partner to the marketplace in that way because we can help them do the product side as well. Good balance between that, and we're just more attractive to the marketplace overall because we can offer more solutions to more people with a common knowledge base.
Now, when we talked about distinguishing AXIS from the rest of the market, the best place to do it is in product because this is where I can tell you what we do and what we don't do and where our preferences are. Very quickly, on the insurance side, personal accident is our main product. That's accidental death, disability, and medical expenses due to an accident. Business travel, you're all, I'm sure, covered here today for attending this seminar outside your office, and you get covered for that. Then specialty health, and I do want to distinguish specifically what we mean on this. We are not obviously a competitor of UnitedHealthcare or Aetna or Cigna or Humana or any of the large healthcare companies. We're not in the managed care business.
We're really looking at specific segments that have healthcare needs or healthcare products that are different and require underwriting and risk selection. We don't make money by squeezing provider costs to make our money. We're taking groups like expatriates who perform very differently than the general market. They get their care differently. They're located in different places. They're generally high net worth, although that's shifting a bit. We really underwrite those risks. We're not throwing ourselves, again, into the mass market. We're very much focused on segmentation and businesses that must be underwritten to be successful. Important in the product choices for us are what we don't do.
When you look at our recent competition, that is other companies who have gotten into the A&H business over the past few years, they've virtually all gotten in one way, something called employer stop-loss, that is a market we very much choose not to be in. We don't like the dynamics of that market. We think it has a very short profit cycle compared to the down cycle, recently, it's become under great pressure from healthcare reform. It's actually excluded from healthcare reform, the states have taken a disliking to it in the sense that they don't like the fact that it's not regulated and are starting to impose some pretty strict conditions on it that I think is really going to hurt that business, there's been a lot of growth in our markets relative to employer stop-loss.
That is not a business that we would entertain from an insurance standpoint. I will mention direct marketing as well. Direct marketing is where you're either via phone or mail or the internet soliciting people. You're putting out large amounts of money upfront, soliciting people and hoping to hold onto them over a long period of time. These deals are out there. We see them all the time. We believe that the profit from that business is being stretched out further and further to longer and longer periods, we're staying away from that business today. It's also a business that, again, more recent entrants into the marketplace have chosen to be that way to enter the market, I think it's a pretty crowded space, especially amongst the life insurance companies that do some accident and health business.
From a reinsurance perspective, obviously it's not about product because they're carving out exposures from the base products to reinsure with us, they have a much broader appetite and do a lot of different things. What people come to us mostly for are accident cat cover, they're concerned about terrorism losses, aviation losses, loss of life related to those type of big events. From a health perspective, they're looking for us to reinsure individual large catastrophic medical losses. That could be anything from organ transplants, premature babies, anything that really puts spikes in the medical cost, we're very happy to take on those type of risk. As I mentioned before, we do a lot of quota share business via the MGU market. I wanted to give you an idea about our risk profile. A couple of key things.
One is we're in all short tail lines of business, they're annual contracts. Every year we get to decide, are we staying or are we going on any particular risk? It's a pretty dynamic process, within, say, a few months after the turn of the year, we pretty much know the results of our lines of business. We don't have any long tail exposure there. This basically shows you our portfolio, we do want a portfolio of products with different risk profile within A&H. Our limited medical product at the bottom is generally pretty low risk, very predictable business, low use of capital to support that business as well. As you go up the curve here, you can see the businesses that use a little more capital and are a little more risky.
Up top is our reinsurance business in essence, and in the lower left hand corner are our insurance businesses, which are largely much more predictable. We want good diversification within A&H, which we achieve with this mix. Also, A&H is not correlated with our P&C exposures. When we have natural cats, we aren't the guys that are worried. We don't get loss of life from those type of events typically. I won't spend too much time on this, but what I do want to stress is that we've taken an approach for A&H that is very much focused on underwriting fundamentals and the P&C approach to the business. A&H is odd in the sense that it's written by health companies, life companies, and P&C companies, and we have a particular prejudice towards making sure that the main thing that we do is underwrite and understand our exposure.
I don't think there's any company out there that does as much as we do in terms of risk management, in terms of our accumulation management and catastrophe modeling. We build a lot of proprietary models and realistic disaster scenarios because there aren't a lot of commercial models available to us. We do the same peer review process, 100% of all of our reinsurance deals, 100% of all our MGU deals are peer reviewed. Each product has a combined ratio target that provides the proper risk adjusted return in that continuum that we just showed you. We do manage a global portfolio, and most importantly, we try to achieve a global standard in underwriting. We'll see business in London that we see in the U.S. We shouldn't have a different answer depending on where we handle the business, of course.
I want to talk to you a little bit about the portfolio again because we're trying to balance a number of things. One is customer. We want a mix of customers as I showed you before, but also very critically, geography and product. In 2013, our expected product balance is about 64% health, 24% accident, and then a mix of our specialty and travel lines. That's skewed today because we have a couple large quota share medical deals out there. Over time, in our long term target, we expect accident health to be roughly equal, about 40% of the book each, and then our travel business and our specialty business to grow a little. It's important to our mix. It's not mandatory, meaning we don't have to hit it on any date to make our numbers, but that's what we envision in the long term.
I will note today, too, that our overall book of business is 30% insurance and 70% reinsurance. That mix is going to change over time as well. We will ultimately become much more of an insurance player than reinsurance player. It's just taken longer to get our insurance business up and running, of course, but we see that trend moving pretty quickly right now and the change in our numbers, and you'll see that on the next slide. From a geography perspective, today makes sense that since we started in the U.S. first, as I showed you on our timeline slide, that most of our premium today is in the U.S., 50% of it. We really expect that to change pretty dramatically over the next few years, where we expect about a third of our business to be U.S. and two-thirds of it internationally.
Those are our target markets today, U.S., Canada, North America, U.K., Continental Europe, Africa, Middle East, and then Asia. That's where you'll see us over the next few years. We haven't chosen to look at Latin America yet. It's generally a life insurance led market for us, and that's not really what we do. We may look at those markets from a reinsurance perspective. Reinsurance, again, from a geographical perspective, is a way for us to get into these markets without big investments, participate where we want to participate. Some markets will never be big enough for us to get in from an insurance standpoint because we don't want to make that level of investment. Despite all the stuff I just said, I think this is the slide you really wanted to talk about, which is when do we make a positive earnings contribution to AXIS?
If you'll follow the story from the beginning here, our reinsurance business was the first thing that we started. We did not have a big investment to get into that business. We had excellent infrastructure and systems and technology in place because of our existing reinsurance business, and we were able to move that business along relatively quickly. Our only real investment was putting offices up and hiring people. I can tell you at the end of 2012, our reinsurance business, the U.S. reinsurance business, the first thing that we started was in the black, was already making money after two years. That was what we consider a pretty big accomplishment for us. The insurance business, as I described, is still really getting off the ground. It's starting to accelerate pretty rapidly from a premium standpoint, and it's really more of a monthly building business.
You'll see it progress as we go throughout the year. Most importantly, on the right-hand side here. A couple things I'd like to point out to you. We had $161 million of premium at the end of 2012. We had a technical ratio, that is our losses and our commission expense, in the very low 90s relative to that, and we think we can get to our breakeven at roughly $300 million of premium. We've already written in the first quarter of this year, $126 million. That's as much as we wrote in all of 2011. The premium progression and the growth that we're getting is very good, and we believe and expect that to be sustainable. Our insurance business is coming on more and more. It's not a January 1st business, it's a monthly business.
In particular, our U.S. insurance business is heavily skewed towards the latter half of this year. Our expectation is that we're going to continue to make this level of progress in terms of our growth. The faster we grow, of course, the more our expenses are diminished, and that's, of course, the key for us to move our business over the line. Quick summary. Very proud of the team that we have. I think we've really created a reasonably effective global company in less than three years, and the marketplace has responded to us very well. The whole idea around compliance and products is a distinguishing factor in how we're viewed in the market and a key part of our value proposition. I can't tell you how much, again, this really means in today's market.
This is what brokers and customers are talking about as opposed to a lot of the things we talked about in the past. We really want to focus on product development over the next few years, and we've staffed ourselves to be able to do that. The hybrid model, having the ability to do insurance and reinsurance, has been a powerful tool for us to move quickly. Lastly, we're technicians. We're going to stick to businesses that really require underwriting expertise. We're not going to be a marketer in that sense. We don't believe that that's where the true profit is, and we're going to sustain our business that way. Thank you for your time today. It's nice to talk to everyone, and I believe I am about to introduce a break. Thanks.
Thanks, Chris. Indeed, we do have a break now. We're running about 10 minutes behind schedule. We have coffee and refreshments in the room across the hall here, and I'd ask that you assemble back in this room at approximately 2:50 P.M. Ladies and gentlemen, I'd ask that you assemble in the main hall here so that we can commence with the final two presentations and move into the question and answer session. Okay, ladies and gentlemen, please take your seats. Our next presenter is Michael Steel, our Chief Risk Officer.
Hey, good afternoon. I'm Michael Steel, the Chief Risk Officer of AXIS. I've been with AXIS just about five years now. I'd like to talk to you about a couple of things about the way we manage risk within AXIS. First thing I'll do is just provide an overview of our risk management framework and how we apply risk management in practice with a few examples. Then I'll talk about some of the strategic initiatives that you've heard about today from Albert, Jay, Jack, and Chris, and how we think about them from a risk point of view and some of the things that we've been doing from a risk management point of view with those.
The slide here sort of talks about the key components of our risk management framework, and I think the most important element of this, and I think you've heard it from the presentations that we've had already, is really about our risk-aware culture, that risk management is embedded within the decisions that we make within the group, and that risk-aware culture is really important. From a governance point of view, you'll have seen within our 10-K sort of how we describe our risk management framework. We've got a board risk committee, which we've had since 2007, a risk management committee. I've got chief risk officers within each of the business units, and where necessary, we've also got legal entity chief risk officers. We do a lot of natural catastrophe reporting on our reinsurance segment. We do daily roll-ups of our natural catastrophe reporting.
That comes up to a weekly reporting across all of our different businesses, and that weekly reporting on natural catastrophe aggregates is reported to our Executive Committee on every Friday. For our counterparty credit, you've heard a lot about the initiatives that we've made on the credit underwriting. We look at counterparty credit. We monitor those notionals across all of our counterparts across all of the formats, both on the investment side and on the underwriting side, to review the concentration risks that we may have by taking counterparty credit risk within the different formats. Those are reported on a monthly basis along with all of our other risks within group dashboards, which we report to our Risk Management Committee. We sit down and review those risks within the dashboards and also all the risks within the organization.
On a quarterly basis, those dashboards are reported to our Group Board Risk Committee. For our legal entity boards, we also report those legal entity dashboards on a quarterly basis. They're reviewed by the RMC, and then they're reviewed by those legal entity boards. We have a capital model which has been developed in-house and has been subject to independent review. It assists us in really understanding the risk within the organization. As you've heard Albert say and others say, we just don't take models at face value. We want models to inform our decision making, not to rule our business. Finally, sort of a component on our risk management framework is about our business plans.
Our risk management framework is embedded within the business plan process, our business plans are tested against the risk management framework to ensure adherence to the framework prior to us underwriting that business plan. When we think about the composition of our capital at risk, we think about it in terms of a number of different elements. If we break it down to the key components, we've got the prospective underwriting risk. We've got the reserving risk and investment and other risks, market risk, credit risk, operational risk, those types of things. If we look at the prospective underwriting risk, and this output is taken from our economic capital model, we believe that prospective underwriting risk represents about 50% of our overall risk.
As you can see from this pie chart that we have here, that property catastrophe risk is the largest driver of our capital, around about 40% there. But you can also see that we have a diversified portfolio of risks from the professional lines, the casualty, the credit, the motor. So it's a very good spread in terms of the diversification within our portfolio. We talked about property catastrophe risk. We've had various discussions with the investor community over the last few years within earnings calls and other presentations which have been done. There we've talked about how we've been rebalancing our natural catastrophe portfolio. Here we show the 1 in 250 annual results from our natural catastrophe portfolio. As you can see since 2011, that we've reduced those exposures in aggregate by around 25%.
We expect the portfolio to stabilize at these levels, particularly as, for example, with our excess insurance business, some of the cat specific MGA relationships which we had will run off through 2013 and will stabilize it around these levels. At these amounts, we believe that our overall natural catastrophe risk is appropriately sized for our business and our portfolio. In the first slide, we talked about the planning process. The capital model, our capital model is an integral part of that process. It provides information for us to help us make better decisions about our portfolio. As I said before, it assists in our decision making that using these types of tools. Our risk management at both the segment and the group level review all of the assumptions within our business plans, be they current business plans or new strategies which we may pursue.
Our actuarial team, which is led, as Albert mentioned, by Eri Gieseke, validate all of the business plan loss ratios. We test our business plans against the risk appetite and tolerances to make sure that we're in compliance within our overall risk framework. As we take the business plan on an annual basis to our board and to our management through the annual approval process, we also provide prospective risk dashboards showing how the plan fits with our overall risk framework. Through that planning process, we review changes that may come up within the plan to see the impact on capital. Having approved the plan, we monitor the risk on an ongoing basis through the dashboards, as I've mentioned previously. Looking at the overall risk and return profile of the portfolio.
We calculate return on equities and the probability distributions around return on equities on a number of basis, be they a GAAP basis, GAAP financial basis, an economic basis. We may look at return on rating capital. We can look at standalone return on equities. We can look at them lines of business as part of subsets or part of the overall portfolio. There are very many ways to look at our return on equity. Here we show the probability distribution of our 2013 GAAP financial year return on equity. This is discussed at the planning as we go through the approval process. It's discussed with management and the board on that annual basis as to what we're going to write business wise within the next financial year.
Whilst we don't show numbers on this, I could take you back to the slide earlier where we looked at the prospective underwriting element of our overall portfolio. If we look at that prospective underwriting element, and we look at it on an economic basis, we can say that these sort of when we look at that prospective underwriting, we look at the ROEs that it could generate. We think that prospective underwriting generates around about a 10% ROE on a group wide basis. We see this as an improvement over our 2012 plan by about 100 basis points, that's really led by a combination of factors, the improvements in the rating environment, new initiatives that we've talked about, and also the overall diversification that we have within the portfolio.
How do we think about diversification in action, and how do we use these types of tools to help us create the portfolios of risk that we want? We can start off by looking at a business if we were only a property catastrophe writer, and this is similar to the sorts of slides that you've seen Albert and Jack and Jay present earlier. Property catastrophe only business, we'd have high volatility and high expected returns from that overall portfolio. Adding diversification to the portfolio has two impacts. It lowers the expected return. We think sort of adding that diversification to our portfolio lowered the expected return by around about three or four percentage points. Also it significantly reduces the volatility within the portfolio. We can sort of look at how we can add these new initiatives and other sort of diversifying risks.
For example, if we look at our credit underwriting line of business, we see for those underwriting lines of business that the marginal return, as Stephan and Jack have talked about earlier, is much greater as we model it than the marginal risk, it improves the overall portfolio. We also see similar positive effects from a lot of the new initiatives that you've talked about earlier. As those new initiatives start to maintain scale, we believe they'll have a positive impact on the risk-reward profile of our business. Look at another dimension of our portfolio, this is sort of looking at our reinsurance purchasing strategy for our AXIS Insurance business. Here we're focused on non-natural catastrophe risk.
Our goal here is to optimize our reinsurance purchasing strategy and customize it for our scale, the scale and diversification within our portfolio as we see AXIS today, not where we were previously, but as we see AXIS today. The blue square on this chart is the baseline, which is the 2011, 2012 reinsurance program that we purchased. Through this whole process, we reviewed different strategies along with management, our risk team, and the actuaries. Look at different strategies where we could increase the amount of retained risk we have within the portfolio. What we find through this, again, given our overall scale and diversity, is that the premium saved through not purchasing some of these covers far outweighs the amount of additional risk that we would retain from doing that.
As we've said, models are only one aspect of any strategy that we may pursue, they'll help inform our decisions. We anticipate that we'll likely increase the retentions, we've started some of this increasing of our retentions. We're likely to continue to increase those retentions. We'll also review changing market conditions. We'll also review the overall portfolio composition to make sure that this still makes sense as we pursue this particular strategy. Turning to the work that we do on asset risk with our investment colleagues. As part of the planning process, we perform an annual review of our strategic asset allocation. What we find, as you would expect with the scale of our portfolio and the element of fixed maturity, is that a portfolio is very sensitive to movements within interest rates.
What we find through this process is that adding risk assets to the portfolio, which are less correlated to our fixed maturity sensitivity to interest rates, improves the overall return and lowers the overall risk within the portfolio. Our strategic asset allocation is again approved by our board, as we've discussed previously, and we also check that it complies with our risk framework and the risk tolerances which are applied to our overall portfolio. Joe, in a few moments, will talk about how we've implemented this plan and moved ahead with the actioning of this particular strategy. As we think about risk within AXIS, what we're really looking for is the right balance here. We've talked about diversification. It's key to portfolio construction, both across our underwriting and our investment portfolios.
We've talked about initiatives of reducing cat as an overall percentage of our portfolio and reviewing diversifying initiatives to improve the risk-return profile. I think what we conclude with is that our risk management at AXIS is not about risk avoidance. It's about taking risk more intelligently and allowing us to create a better optimized portfolio, which will deliver a better risk-adjusted return. If I could turn to Joe to talk about the finance side.
Thanks, Michael, and good afternoon, everybody. I'm Joe Henry. I've been with AXIS for about a year, and like Jay Nichols, I'm very happy to be here. I'd like to cover three topics with you today. The first is our investment portfolio and how we positioned it for the environment we're in. Secondly, our loss reserves and why we think we are maintaining the strength that AXIS has had in this area. Finally, our capital, how we are managing it today, and how we will manage it into the future. The first, investments. We have really three major goals. The first, and these are in order, by the way. The first is to protect the balance sheet. As with underwriting, the primary focus is to avoid outsized losses. The biggest risk to book value coming from the investment portfolio is rising interest rates and spread widening.
I will discuss the things that we've done and will continue to do to mitigate these risks based upon the cost of these mitigation strategies. Second, to provide consistent annual income. This goal is frequently at odds with the other two, but remains an important one. An example might be adding hedge funds to the portfolio. It mitigates interest rate risk and contributes to book value growth, but it adds to net investment income volatility. Then third is to contribute to book value within risk constraints. The primary risk constraints we have are percentage and type of assets appropriate for this portfolio. AXIS Investments portfolio has made a significant contribution to book value over a period of time. You can see we've had good, consistent contribution coming from the investment portfolio with the exception of 2008.
The 2008 dip was due primarily to a strategy leverage to European credit spreads. We held this position for much of 2009 and 2010. Our last exposure to this strategy was eliminated in June 2011. These numbers, by the way, on this chart are pre-tax, but given our very low tax rate, pre-tax and after-tax are within $200 million of each other. Our investment results relative to our peers have been very strong since the financial crisis. The factors contributing to this performance include remaining invested in strategies and asset classes which were significantly impacted by the 2008 financial crisis until they recovered. Second, hiring AXIS' first time chief investment officer in June 2007, and the build-out of the AXIS investment team. We had three people on this team in 2007. We have 12 now.
As Mike mentioned, increased governance and controls, development of a more robust strategic asset allocation process, and meaningfully increased diversification of the portfolio. Let's get into the investment process and controls a bit. The left side of the slide shows in blue what AXIS Investment does, and the green box shows what is done by the 28 investment managers we use in our fixed income, hedge funds, direct lending, and equity areas. Essentially, our investment team determines how we are going to allocate the portfolio, designs customized benchmarks to monitor performance, and selects the firms that we outsource to. These firms select and execute the trades. Then we monitor compliance and performance. Our management team monitors this portfolio on a monthly basis, and our board does so on a quarterly basis.
There is very close interaction between Mike's enterprise risk management team and the investment enterprise risk management team. The big question is the extent and the timing of interest rate increases. As you can see from the charts, everybody knows U.S. Treasuries are at an all-time low. As rates rise, unrealized book value declines are likely. You might ask, what are we doing about that? We are diversifying sources of investment income while maintaining overall quality. Our overall quality is AA- in the portfolio, and we're going to keep it there. You can see on the right-hand side that we've made investments in CLO debt, emerging market debt, and short duration high yield securities. The aggregate size of the investments in these areas is approximately $3 billion. Are we offsetting the decline in interest rates in the fixed income portfolio?
With 82% of the portfolio in fixed income, the short answer is no, but every bit helps. As far as rising interest rates, what are we doing to mitigate that? We are maintaining our short duration in the portfolio itself and investing in assets which should benefit in an inflationary environment. As you can see on the right-hand side of the seesaw there, inflation-linked securities as well as increased risk assets, specifically equities, hedge funds, and high yields. The aggregate size of these mitigating assets is approximately $700 million, and we're keeping the duration short at approximately three years. The portfolio today continues to be high quality when compared to many of our peers, largely made up of very liquid investment grade bonds with a relatively short maturity. Now let's discuss loss reserve adequacy. Before I get into this chart, just a couple of introductory comments.
First, as you know, AXIS has been always conservative in terms of our policy. We set our initial loss ratio at an appropriate level, and we react slower to favorable experience, and we deal with unfavorable experience on a timely basis. We have a comprehensive governance framework. Reserve analysis is performed by qualified actuaries. As is mentioned, we've added Eri Gieseke as our chief actuary. He's an additional set of eyes looking at our reserves, as well as advancing our analytical capability. We have multiple levels of management review before management selects a best estimate, and we have independent annual reviews and opinions by two outside actuarial firms. Finally, we have a robust quarterly review process. We review actual versus expected experience and actuarial assumptions as is appropriate.
We have in-depth discussions with the underwriting personnel and claims personnel, and we discuss our actuarial analysis with our segment and management reserve committees. The top part of this chart shows the split of reserves between short tail, medium tail, and long tail business, and splits reserving between case reserves in blue and IBNR reserves in red. Focusing on the medium and long tail, the vast majority of the reserves sit in IBNR at 77% and 70%, respectively. The bottom part of this chart shows historical reserve development over the last 11 years. Every year has been positive. That has continued in the first quarter of 2013.
While much of those reserve releases were in short tail lines, we have also benefited from releases in professional lines, and most recently, we began releasing reserves in casualty lines in both our insurance and reinsurance segment, which we have used in part to add to reserves in more recent accident years, which are still green regarding development experience. Last, let's cover capital management. Our overall capital position at March 31st on a pro forma basis for the recent Preferred Stock Series D issuance is just north of $7 billion, split between common and preferred stock and debt. We were very happy with the 5.5% rate we were able to achieve on the Series D Preferred and increase the size of the offering to help us fund stock buybacks, among other purposes.
Our debt and preferred stock to total capital is just over 23%, which is well within our internal guidelines, and the rating agencies were fine with that as well. We do not anticipate any major changes in our capital structure until 2014, when part of our debt comes due. Okay. AXIS has a track record of efficient capital management. In the solid blue bars below the line, this graph illustrates capital raised in the early years of $2.1 billion as compared to the common dividends and shares repurchased of $3.4 billion above the line for a net capital return of $1.3 billion. That represents an internal rate of return of 16.9%.
This slide shows that since 2009, we have bought back 28% of our shares outstanding. This has improved our compound annual growth rate in diluted book value per share by almost a full percentage point from 10.4% to 11.3%. We have increased our dividend every year at a compound annual growth rate of 8.6%. It is currently $1 per share on an annual basis. The dividend yield is 2.2%, which is at the high end of the range of our peers. What is our overall philosophy in this area? As you've heard from Jack, Jay, and Chris, we are expanding our businesses organically and through new initiatives. We monitor capital carefully at a group and legal entity level, but we will return capital to shareholders if we feel we can't put it to good use.
Although we do not have a very complex organizational structure, we do have to monitor regulatory capital in the U.S., Bermuda, and Ireland, as well as various branches around the world, and maintain an appropriate capital buffer. In addition, we need to ensure that there is very little chance that we'll have issues with the rating agencies. We have to maintain an appropriate capital to protect our current ratings. In summary, we are maintaining a high quality liquid portfolio that is positioned well if interest rates rise. Our loss reserves are very strong and will continue to be so. Our balance sheet is very strong, which should enable us to fund future growth and continue to return capital to our shareholders as is appropriate. With that, I'll turn it back over to Albert for some concluding comments.
Well, this concludes our prepared remarks part of the presentation. Hopefully, we've kept our word when it came to communicating what we believe are the strongest attributes of our organization. Underwriting excellence. It's been the bulwark of our performance to date, and we certainly expect that it will continue to be so in the future. Hopefully, again, going through the various businesses, the various case studies, the strengths, the depth, the focus of our multiple franchises across the world, multiple lines and multiple franchises. Our commitment to continuing in our entrepreneurial fashion, our diversifying growth, and our enhanced portfolio construction, which will deliver both top-line growth in the company, and more stable earnings going forward. I think we've talked a lot about today about our DNA, how we work, the energy around the entrepreneurialism, the teamwork, the peer review.
All of these approaches are things that we've had in our company now for over a decade. They work well. We've broken down silos where we found them. I think ultimately, the team approach that we have to our risk management, to our business generation, will continue to help us forward. Again, as Joe just showed you, our capital base, our balance sheet, our financial strength are nothing more than an additional promoter of our business strategies. We are not the largest company in the world, but we certainly have enough capital to support our business, enough capital to be respected in terms of the capacity that we provide, and in terms of the credit quality of our payables. That concludes the prepared remarks. Linda, I believe we're going to take a five-minute break while we set up. No? We're going to just set up now?
I'm going to follow Linda's advice.
Great deal. We're going to have management assemble here on the stage. I just ask you to stay in your seats. Raise your hand with a question. We'll have two microphones circulating, and we'll try to get all questions answered by 4:30, if at all possible.
Good, boys and girls. Thank you. Are we good? Go for it. Do we know who's going to have the first question? That's probably the right way. I'll just take the last one. Do you see?
Front and center, baby.
Front and center, baby, right. Okay. We've got it. Yeah.
I just wanted to ask about acquisitions. I know you've done small acquisitions in the past. What is your appetite today? Is the environment conducive that you think we might be in a period where there might be more opportunities or less?
Strategically, to speak about acquisitions, we've made them in the past. I think they absolutely serve a role in the strategic growth of the organization, and we will pursue those. I think the most important thing is that one of the things that I hope we've convinced you about is we already have a lot of what it takes to be an outstanding global company. We don't need to make an acquisition to get to the next step in our strategy. That doesn't mean that there are not a bunch of bolt-on acquisitions that could be very interesting to us, and we would look at them all the time. I can tell you up front, one of the areas that I'm most interested in making bolt-on acquisitions is to support the franchise that Chris is trying to build here. Obviously, we're not yet where we want to be.
We've got strong ambitions about the growth in the A&H area, and that would be one of the areas. While we don't need it, and we are not spending a lot of our time diverting ourselves from the core business, we will continue to look at them, and if they make sense, we'll look at them. It's not the front and center item of our daily agendas.
I guess another question for Chris, if I can. Can you describe the competitive environment that's allowing for the rapid buildup in the A&H business that you're pursuing?
Sure. A couple things. I'll separate it from insurance and reinsurance. First, on the insurance side, the events with AIG did open the door. It changed a lot in the marketplace and allowed us to get in on the insurance side relatively quickly in the U.S. and the U.K. On the reinsurance side, I would say, in my opinion, there really wasn't an accident and health leader in the marketplace, we staked out certain parts of the market that we were interested in, largely the accident cat side, which was traditionally done almost exclusively by Lloyd's and then Bermuda for a while, but that disappeared. We were able to come in with more capacity, more focus on that, and kind of steal a little bit of a march on the marketplace there and break into programs.
Is it fair to say, Chris, that there's a couple of big gorillas, a couple of smaller companies, but other than that, it's a very fragmented market with a lot of opportunities?
It is. To come back to the insurance side, too, just tactically what we've attempted to do is if you think of the team that we have in a very fragmented market, if we take the four largest insurance carriers out there, which would be AIG, Chubb, and let's throw Zurich in at the end there. There's about $10 billion-$12 billion of premium there. All we have to do is take half a point of that every year to make our number. We position ourselves very much in certain segments. Our A team is generally going against their B or C team. We're going to win. From that standpoint, we've just been very select and very targeted about what we want to do in the marketplace. Our market is highly segmented.
It can be defined in many ways. We go after things in a very narrow, focused way and with more resources than they have, even though they're bigger than us.
Hi. I think Michael mentioned in his presentation that cat risk is now appropriately sized for the company overall. I understand this is a complex question to answer because you're constantly reviewing the overall portfolio and managing to several different variables. I just want to make sure I understand. The implication of Michael's comment is that we would not be looking to shrink cat risk further? We're comfortable where we are at this point overall for the firm?
You want to take it or me take it? Let me start with that. I don't want to give you the sense that we're not going to shrink it or that we're not going to grow it. Right now, the book is where we want it to be. The most important thing for us over the last 18 months was the fact that there was certain peakiness in certain parts of our portfolio where we felt we were overexposed compared to our appetite for what we wanted. Frankly, there were some regions where we were underexposed. You saw Bill's presentation, and, well, in some cases, we're a little low in some of these market shares, and there was opportunity for us to grow.
Given where our portfolio is today, given where the pricing opportunities are today, given the funding that we're utilizing to support our cat business today, where we are makes sense for us. All of those things will change, and all of those things will then cause us to reconsider our appetite for cat in the context of the overall portfolio. Where we are today is not a bad place. Anything you want to add to that from your perspective?
No. I think the qualification in that statement is retained cat risk.
Yeah. Obviously. Ben, you hear that? Jack?
Jack.
Yeah, a couple of questions. There was a lot of talk about risk management, Michael, your presentation was very good. It's hard to get a sense of what's changed, though, in the last several years. Some of the stuff I know has been in place for many years. Has there been an increased rigor that's put in place over the last couple of years on risk management? Really, what's changed, I guess?
I think what's changed, I joined the group in 2008 as our first chief risk officer, really it was about formalizing a lot of the risk management that we had in place previously. Jack mentioned the peer review process, which is embedded within our underwriting. We had a lot of very good risk management practices, which we just didn't call risk management. They were, as I mentioned earlier, risk management was really embedded in a lot of what we do. Really what we set about doing in 2008 was formalizing the governance structures around risk management, formalizing the use of the capital model within our business planning process, really putting more analytics behind all of this to help inform some of the decisions that we're making so that we can really use that to better construct the portfolios going forward.
I think that's all changed from AXIS internally. Also, I think you've seen the whole regulatory environment change around risk management as well, and the rating agencies are looking at us from a risk management point of view as well. We need to respond to that and make sure that our processes are very strong and they stand up to external scrutiny, as well as being something that we value as part of our business.
Jack, you've been around for a while. Anything that you want to add to that?
Certainly even prior to Mike coming on board, we didn't have our own risk managers embedded in the individual businesses. Michael mentioned it earlier in his presentation. He made a reference to the fact that he has embedded risk officers in each of our units. We now have our own risk infrastructure with much better data and analytics than we had in the past. Whereas we behaved, as Mike said, like a well risk managed company, it's much better understood as to what's required of the process. We're able then to take the output of it and use it and apply it to the business itself, and I think that's a critical piece. A real output that has a demonstrable use in the business rather than just doing it for fun. Not that we did that before.
If I can add to that, I think it's exactly right. Nobody is saying that we didn't have a risk-aware culture from the very beginning, and if anybody gave you that impression, then it's wrong. I think it's what you do with it. You can measure the risk, if you've got a high-risk appetite, you just say, "Yeah, I've got a high-risk appetite." I think in my mind, we're spending more time now really with using the tools that we have to do more analysis in terms of portfolio optimization. I think for me, that's the biggest issue. We always knew what kind of exposures we had on the cat side. We're now thinking more in terms of how does this fit in the overall portfolio? We had the information.
We certainly individually had debates about what was the right reinsurance purchase and the right levels here or there. I think now we're saying, "Well, how does that all fit in? Are we getting paid?" To me, the most important thing, Michael and I talk about this. The risk management is not about limiting risk. It's about choosing what risks you want to take. Today we spoke to you about two different directions of risk, three different directions of risk
In terms of, yes, we're reducing cat risk, but yes, we're also going to be increasing retained risk on a per-risk basis. We talked about the fact that we're happy to add risk assets to the overall portfolio because in our mind, that's the right thing to do to the investment portfolio. We talked about adding credit risk. We talked about other diversifying risk. What we're doing here is we're just adding one more level or one more layer to things that we already had. Jack has a great quote. When people say, "My God, ROE, what are you going to do? Are you going to use the ROE to limit my business or whatever?" Jack likes to say, "Oh, I shut down businesses long before I heard about ROE." We know what the profitability of the business is.
It's not like we've been discovering something new, we have different approaches, different angles to look at a problem and hopefully get to a better solution.
That's very helpful. Two other questions on the A&H side. The first one is, can you be long-term in the insurance and reinsurance business, or is there some conflict? Then separately, when you get to scale in that business, what kind of ROE will you generate? It does not look like there's a lot of capital that needs to back that business.
Sure. The first question is, I would say virtually every major insurer of A&H other than my old company is a customer of ours. It hasn't been any impediment for us to be in both sides of the business. We have a very distinct reinsurance operation. It has its own underwriting actuarial risk resources. They operate in the reinsurance market. The intent is to be there and to build a pretty strong global reinsurance platform out of that. Although we certainly assume that the insurance business will eclipse that in terms of size one day. Our goal is to, I guess we'd say it this way, is whatever % of premium I write as part of the company's overall premium, I want to have a bigger proportion of the profits than that.
If I can quote some general numbers from prior life, 3% of the premium, 6% of the profit. We want to be something in, I'd say, the mid-teens ROE is what the target that we've talked about, and we think that's achievable once we get to scale.
Thank you. You guys spend a lot of time talking about teams and the employee base and the underwriting talent, and how long people have been at AXIS. There's a couple of competitors out there now that seem to be on the hunt for talent. One on the island, one in Omaha. Wondering if you could talk about if you've made any changes to employment agreements, employee retention, how you plan on maintaining the business that you've built here so far.
I think the hunt for talent started way before the island or Omaha. This is the business we're in. We're in the business of recruiting and retaining people. We can't be spending so much time telling you about how good our staff is and not expect that our staff gets approached all the time. They do. What you need to do at the end of the day, last I checked, slavery was outlawed a long time ago. If people want to leave, they will leave. They can take a contract. They can take a six months, a three months, a one year waiting period. We got one of those. We put on the ice for a year. You can't stop people from leaving. What you want to do is make them not want to leave. That's really what it's about.
The question that we have that we're trying to do is, what makes AXIS the kind of place that people don't want to leave? It's an organization where underwriters really feel appreciated, where they're working with some of the best underwriters in the world, where they're engaged with each other. They challenge each other. I would argue that over the last couple of years, we've done a lot to try and further enrich and strengthen the bonds between ourselves and our staff in terms of giving them more tools and more authority, more empowerment to achieve their goals, more communication, more town hall meetings breaking down the silos so that they feel even more strongly as a part of the team. In my mind, it's very difficult to imagine a lot of places if you're happy, why would you want to go elsewhere?
That doesn't mean we won't lose people. Let's be clear about this. We lose people very often because we've got so many good people that they're second, third, fourth in line. They go, "When am I going to get the brass rank?" If somebody comes to them and says, "Look, you're currently an SVP in charge of this, I'm going to make you an EVP in charge of that, I'm going to double your stuff." Guess what? Some people are going to take that. You can't stop that. That's okay. One of the interesting things over the last year, we've of course lost some people. In all but one spot, we replaced that person with somebody within the company. That speaks to the depth of the bench.
People we know, we know their underwriting results, we know their culture, we know how they're getting along with the business, that speaks to what we've got. When we lose somebody and we replace them from the outside, we do a very good job of bringing in outstanding people. As far as I'm concerned, Pete Wilson's a great hire. We have a stronger U.S. insurance business today than we did before.
Back to Omaha, not specific on the teams. Obviously a big player like that entering the specialty market where you are a big player. Can you talk about some mitigating factors as to why they wouldn't be able to take a lot of business from you? Are they going to be writing different types of business? Will they-
John, can I ask you to stop? I'm sorry. The siren is so loud that I can't hear you, actually. If you don't mind just waiting a second and repeating the question, that'll be helpful. At least to me. I'm the oldest guy in the group here.
Sorry, Alan.
Please start.
Berkshire attacking the specialty business. Can you talk about the mitigating factors that would keep them from either taking business from you or not having a negative impact on pricing, either them taking a long time to get going or some of the mitigating where they're writing different types of business? Why won't they be a threat to AXIS being a superior specialty franchise?
You want to say that?
Yeah, sure. There are always new competitors starting up. We've seen competitors start across many product lines and many geographies over the years. I'm not sure yet what kind of a competitor they're going to be, certainly in terms of the E&S business that they've established. They've got a lot of capital. They certainly seem to be hiring a lot of people. Quite a number of those are people with strong track records in the industry, being reasonably sensible. One would perhaps hope they'd be a more responsible competitor, but we don't know about that yet. Some of the other activity that we're seeing from Berkshire, there's been a lot of publicity around London market specialty panels with Aon and Willis, and we're reasonably confident that it has, at this stage, a limited impact on our business.
We've very strong positions in that London market specialty business, with strong client relationships, strong broker relationships. Where we're seeing the impact, more often than not, is smaller organizations that have minor participations on business are being squeezed out. Those that have more significant participations, add more value, have more expertise, better client relationships, are being retained. I think any new startups in the London marketplace, for instance, would have more difficulty getting on placements as a new market than they might have done in the past as a result. Even then, if you look at the Aon-Berkshire deal, that 7.5%, that generates roughly $200 million of premium to Berkshire out of Lloyd's total revenue of $40 billion. It's a relatively small piece of the market. It's concentrated in a few very specialty lines. I can understand that. It's more visible. I'm not particularly concerned about it.
I don't know what they'll do in the U.S. yet. I certainly know that they appear to have an appetite. How consistent a player they'll be in all of these markets is another question. I think we'd all acknowledge that Berkshire don't have or never had a reputation for being consistent long-term players behind any client or in any particular marketplace. I've no reason to believe that they're changing their approach in either their E&S play or their London market play.
That, in fact, is why it's so important for us to continuously look for new opportunities, new franchises, new markets, because at any point in time, a number of the markets that we're in are not going to be attractive, either because the competitors decided they want to own that market or because of pricing or whatever else. With the breadth of the opportunities that we have, we can focus on growth in other parts of the world. Maybe, and I'm not saying that it will, but maybe we may not get as much growth in U.S. E&S for that reason.
You've seen the number of other opportunities that Jack is pursuing, that Jay is pursuing, that Chris is pursuing, and we'll find opportunities there. The whole point, if you would, is all about not being focused on one market, but having a whole range of opportunities.
Could you talk about the ROE profile that you're writing business at? I believe in the risk presentation, it was mentioned that you're writing at a 10% ROE and that that ROE was about 100 basis points higher this year versus last year because pricing's up on U.S. and you foresee some growth opportunities.
You're asking us to rank them by attractiveness?
Correct. No. Are you writing business at a 10% ROE as for this underwriting year? I mean, is that correct from what I heard?
On average. This rate literally goes from at the very least, very low positive number to, in the case of a couple of lines, very strong double-digit numbers. When I talked about optimizing the portfolio within the constraints of the market realities, we don't have the flexibility that you have. You can buy a stock in the morning, sell it at noon, and buy it again at 3:00. We can't do that. Our clients and our brokers are counting on us to be a consistent market generally. When we talk about moving in and out of markets, it's on the margin moving in and out. At some point, we might decide that a market is so troubled that we want to get out completely, and certainly Jack's insurance group got out of primary casualty in 2010 after shrinking that for several years.
We will do that. By the way, we're getting back into primary casualty because it's starting to improve. What we do as part of the planning process, each underwriter does this, is they decide whether they want to grow or shrink, but it's not getting in or out. We will have lines of business that are less than 10%. Let's be honest, we have lines of business that are less than 5%. We're there because we believe that longer term, those lines of business will deliver an adequate return across the cycle. If we believe that a line of business was always going to be a low return, then we'd ask ourselves, why are we there? Today, whether it's our specialty line, obviously the cat book, a number of other lines of business are providing very attractive ROEs.
We're very happy to grow those. Other lines of business, we talked about US D&O, for example, which is lower ROEs. We haven't grown that much in the last couple of years. It's all about increasing or decreasing based on the relative attraction of any line of business.
That's helpful. Just the second question is on the reinsurance business. We've heard that there's more pressure on the business, and not just the cat business, but because there's a significant amount of capital. Are ceding commissions going up, and how do you view the profitability going forward of the reinsurance business besides the areas that you're focusing on for growth?
You mentioned ceding commissions going up, but if you do the math on the primary rate increases coming through and the ceding commissions taking a percentage of that growth, but there's still growth left over. Our margins are getting better net, even though companies are pushing for a point here, a point there of ceding commission. That cycle comes and goes, and they are pushing on ceding commissions. We're not getting 100% of the price coming through on our participations, but we are still getting growth and margin on those lines.
Just as a follow-up, do you think that lower rates on property cat would mean higher competition among reinsurers for the rest of the business?
I do. I think you'll see it. You're seeing some of the property cat companies looking to hire teams in other lines of business. I think we're very well-positioned in those lines of business that other companies are trying to diversify into. I think we're diversifying ahead of some of those other companies into other lines as well. There is a knock-on effect that the capital markets come in, and they push some capital out of cat. If that capital, it's a reinsurance company, they think reinsurance, they just try to extend out in the reinsurance platform to other lines of business. We may see pressure a little bit, and that's a natural effect. Our job is to position ourselves well with our customers and make sure we're making the right decisions about what lines of business we're in.
There's probably a comment worth making about insurance versus reinsurance. I think that although arguably the buyers are getting a little bit more out of the transaction today by getting a little bit more of the ceding commission and so on, I think one has to recall that the reinsurance industry has done a much better job of holding onto pricing and terms and conditions over the last three, four, five years than the insurance side. The relative strength has been in favor of the reinsurers for a good part of the last several years. What we're seeing now is more of a rebalancing, if you would, between the buyer and the seller. We're both benefiting from the improvements at the primary level.
Because of the relative position between insurer and reinsurer in the past, there's a little bit more catch-up in as much as the primaries are keeping a little bit more of the improvement so that they can have more equality between the reinsurer and the insurer. This doesn't mean that the reinsurance industry is unprofitable right now. Certainly, that's not the case in our book. We had a question over here.
Thanks. This is sort of an obligatory Florida question. Does what's happened in Florida at six one materially change the 10% accident year ROE, given just how profitable Florida's been?
You can talk about Florida, I can talk about the portfolio.
Okay. I'll talk about Florida and our presence in Florida as well. The brokers are out with numbers from the 6/1 renewals saying prices are down 15%, depending on layer and attachment point and things like that, but 15% plus. It's coming from an attractive point to. It's not through the floor in terms of the pricing and the return on risk or return on capital. Our business, as you remember from our discussions in conference calls or previous discussions, where we shifted a little bit of our portfolio to Florida. We had historically not written the Florida specifics or had a big presence with the Florida specifics. We shifted some of our portfolio from the Northeast to Florida last year, but it was not a huge bite.
In terms of the impact on the reinsurance business, Florida has not been the primary focus of the reinsurance business, even though a significant amount of the global risk in the property cat reinsurance business emanates from the Florida, from that peninsula in the Gulf of Mexico. I'll turn it over to Albert, but our scale in that is I think in terms of the percentage of our expected profits and premium coming from Florida, we're farther up the scale as to the impact on us.
That's in fact my answer. The Florida business is such a small part of the overall book that moving up and down by that amount is not having a material impact on the overall average return. Obviously, some of the business that we're writing now, some of it is in fact doing a little bit better than we expected. That's just the way that it all works out. Some do a little bit better, some do a little bit worse. At the end of the day, one good gust of wind changes everything. Right now, we're comfortable that we've got a better book of business today than we had last year, and we're continuing to improve on that.
Steve.
Is Steve done?
Yeah. Okay.
Steve will get the mic at some point. Go ahead.
Sorry. Just a general question on third-party. If you've covered this before, I apologize. It seems that the response to the proliferation of third-party capital has been to make new hires and try to develop that capability. Is that correct, and does that imply that you think this is a secular change, or is it still a cyclical type of phenomenon?
Jay, it's your turf.
Meaning do I think that it's a permanent change?
Yes.
Well, it's been going on for a long time, My answer to the question is yes. I do believe so, I do believe it's been going on for a long time. 20% of the risk is placed into whether it's some form of capital markets vehicle, whether it's cat bonds or sidecars or ILWs that are collateralized. I absolutely believe it's here to stay. The question is how big is it going to be?
The follow on is how do you see that changing the industry? What do you think that's, not maybe specific just to AXIS, but how does that change the industry or the industry as a whole?
It doesn't change my frame a lot in the way I think about the business, which is I actually believe the reinsurer should be the arbiter of where risk meets capital. We have a traditional balance sheet, which is good for a preponderance of our risks, There are some risks that should end up on a different balance sheet that has different return characteristics, different volatility characteristics than our balance sheet. There is a portion of our risk that should end up on customized balance sheets for customized risks. That's what the third-party capital initiative is all about. I think that it's a continuum. It'll become more of it. The market's been going that way since 1998, 1999. It actually started this way a long time ago in Lloyd's. Just to be clear, this is not new in the industry.
The way capital comes into our industry has been very dynamic over the 400 years that there has been a reinsurance industry. The big question for me is how are we positioned to service that capital and service our customers so that we're still relevant in the arbiter of where risk meets capital? I think we're moving into that space to be well positioned to do that.
I'm quite bullish about it, I have to tell you. I think it gives us an additional way to differentiate companies in terms of the intelligent use of this capital. I see two or three things coming out of it. Number one, I'm really hoping that we won't have a class of 2000 and X because if we do have an event of some sort, instead of creating new companies, I think we can just increase the access to third-party capital and better leverage the intellectual capacity of this industry. In that world, again, we're in a good place. I think that although arguably you could say that we're, quote, "late to the party," I think we've got a lot of people in this organization that are very comfortable, very familiar with the intelligent use of third-party capital and that we can catch up pretty quickly in that space.
In my mind, what our shareholders want is a very steady, hopefully high net retained profit. The use of third-party capital is one of the tools that we can use to enhance that net retained profit.
All right, thank you.
Who's got to speak? Who's got a mic?
That's Steve's.
We just need to give the mic to somebody. Who's got the mic?
Steve's got it.
Steve's got the mic.
Steve.
I don't know where Steve is. I don't know if this is a question for Joe or for Michael. Obviously the industry's benefited enormously from unpredicted very low claims cost inflation over the past few years. In addition to company-specific conservatism. Do you have a good enough understanding of what's been driving this sort of favorable period so that you can appropriately anticipate if and when it inflects?
If you figure it out, I've got a job for you. I think there's no question that we've had a lot of, I'll open this up to everybody, we've benefited a lot from the Bush Supreme Court, among other things. I think that the justice system has actually been more pro-business, pro-insurance over a long period of time. We have just normal cyclical ups and downs in terms of frequency. What I will say is that the industry studies that we're looking at would indicate that a lot of our peers are starting to see increased frequency and severity in the professional liability lines, D&O lines, and so on and so forth.
I know there's a lot of industry studies that are done on triangles and so on. A lot of them are saying that, gee, a lot of people may have net positive reserve releases, when you go down into the details, you see a few reds in some of the recent years. That may be some of the things that we do, which is early response to bad news and slow response to good news. I think you're hearing a lot of that. Certainly, in the D&O side, one of the things that's been driving the pricing in the D&O is the increases in loss frequency that we've seen. Anybody here is welcome to add their comments to it. We were observing it. I'm not sure that I'm prepared to say when the inflection point is.
Eric, do you have a view of when it's going to inflect? Sorry. Mr. Gieseke.
Have mic will travel. I'm wondering if we can dig into the insurance initiatives a little bit further. Jack, in your presentation, you laid out the premise that you want to maintain the high profitability you have, lower the volatility. You've laid out a number of the strategic initiatives that you're going to put forward with that. That kind of speaks to what you're doing in a vacuum. Obviously, you're not operating in a vacuum. There are a lot of competitors out there. This business has to come from somewhere. The business you're talking about is often amongst their most cherished areas of business, being high profitability and low volatility. Can you talk about why that business is going to come to you, assuming you're going to maintain your underwriting standards to get it?
Obviously, there's always an incumbent, or in most cases, there's an incumbent market that has that business. Many of them may guard it jealously. There are a lot of ways of presenting a better sales proposition, a better client presence, a better product in the first instance, perhaps better distribution, perhaps better claims handling and claims servicing. Then, of course, a broader suite of products, perhaps, to offer a particular client. In the case study that Joseph England presented earlier today around one particular manufacturing company, we sell that company a dozen different products. Out of our top 100 clients globally, we sell in excess of an average of 8 different policy types to them across professional lines, across property, across casualty, across a host of other specialties.
Yes, there are other carriers out there like us, but there are an awful lot of companies out there that don't come close to being able to offer the geographic footprint to us to be close to offering the product suite that we do. We have some significant advantages from that perspective. One thing also, there is a degree of dislocation in the marketplaces at the moment, this is driven by the major brokers. Certainly, one of the things that does come with the greater power that they have is that many of them place a great deal of business currently with thousands upon thousands of carriers. Some of them are very, very small. Many of them, I assure you would never have heard of. This is all over the world. This is throughout the U.S.
They're making very significant strides towards concentrating the placement of their business with fewer, higher profile, more professional carriers. We've found to date that we have been one of those carriers that's frequently chosen to participate and to be involved in the initiatives that they're building on that basis. Will we be involved in all of them? No, absolutely not. Certainly, we're at the forefront. The important thing is to have enough product, to have people of the right quality, the expertise, geographic footprint, and the capital to be involved in the conversations, not to find out about them in the newspaper after it's all taken place. We're in the right place strategically from that perspective. Of course, there's the different types of initiatives. There's a whole different variety. Some of them involve acquiring new teams of people.
Some of them assembling new portfolios of business. Some of that business is not necessarily renewable business. It could be project-based business. There's a whole host of different types and distribution that we haven't penetrated to date. Albert mentioned our primary casualty initiative as an example. When we closed that down, it was a purely wholesale operation. At its peak in 2004, I think it was about $94 million. We cut it back to $33 million in 2009. 2010, we closed it down. We didn't believe the wholesale marketplace could ever present us with an opportunity to produce a sufficiently broad, diverse portfolio business through the cycle to be able to make a profit. We retained all of the claims staff.
We retained the leadership of the team, and we tasked them with creating an alternative approach to the distribution of that business by find a form of distribution and an approach that would enable us to assemble a portfolio with more balanced scale and diversity. The new platform that we've created is very much more of a retail focus targeted at very specific industry sectors. Now, are there competitors in those marketplaces? Yes, absolutely. It's a much, much bigger marketplace. There's vast scale. Our current penetration of that marketplace with the major retailers, the second tier and the third tier is very, very light. From our perspective, in the U.S. non-life P&C market, excluding professional lines, we currently write about $150 million or so of business. That's a marketplace worth hundreds of billions of dollars.
It doesn't take a great deal of penetration if we're very sensible, cautious, approach pricing in the right way to actually make significant headway relative to our portfolio. Not necessarily without trying to We wouldn't have to try and shift a significant number of major players to try and create that kind of a significant share for us. It's still relatively minor in the overall scale of the marketplace. It's the scale of the opportunity in some circumstances that presents the opportunity for us. Again, we already have very, very strong relationships with those producers, provide them with multiple products in other areas. We're pretty confident. We know that with market timing, with the competitive state of the market, some of these initiatives will be tougher than others. If they prove to be too tough, we'll just scale. We'll step back.
We won't hire the people at the same rate. At the same time, if we see the opportunity increase and present itself sooner, then we'll respond very quickly and accelerate them.
Nothing to add to that one, but I do want to make one comment with regard to your question. Specifically, you said, if I heard properly, this is the business they want, low volatility, high profits. I want to react to that. Most of what we do is not low volatility in that line of business. I like high volatility business because that's the business where people are going to pay us to take the risk. Where we are looking to reduce portfolio volatility is not in the individual risk, but in the construct of the portfolio. What I want is a portfolio of diverse volatile lines, because each of these volatile lines will hopefully give us a higher profits opportunity. It's through the diversification of the portfolio that we reduce the volatility. Some lines like A&H are in fact low volatility lines.
We grew in the motor business through reinsurance in Europe. That's low volatility business, although we haven't had a problem growing there. Those are great ROE lines because they do that both. The focus of what we're doing is growing a specialty insurance franchise.
I think during Bill's presentation on the reinsurance segment, he made a comment about the misuse or misinterpretation, I forget his word, of PMLs, and I'm curious if you could share or elaborate upon that comment and perhaps what you think differentiates the PMLs that you publish versus what you think is being published by peer companies.
Bill, what did you mean?
You have to grab a microphone. You can speak at the podium.
Nope, he's done. No, he doesn't.
I think it's an easy answer because I think you maybe misinterpreted me. Those PMLs are relatively standard PMLs using fairly sophisticated modeling tools. I was really referring to PML associated with all the other lines of business where that terminology is also used, where the characterization of that term is very variable. I don't think it was related to the cat side, which is what you're asking a question on.
I will take a shot at it. When people use the term PML, some people think the one in 100 is the PML. Some people think it's the one in 250. Some people think it's the one in 500. When somebody says my PML is X, it doesn't mean that it's the one in 250. That means that it's the probable maximum loss. As Bill said, in different businesses it's defined as a different thing. Like is it a vapor cloud at a plant is a PML or is that an MFL? All this talk of PML, MFL, all this is a little jargon-ish in terms of, I like to think about it as where are you on the distribution and can you look at a risk across the whole distribution?
Be very careful when you look at, if you actually do get the right definition of PML and you have somebody say, what is my one in 100 or what is my one in 250? The models are not very good absolute metrics. Sometimes they're not even very good relative metrics. They're estimates. Over-reliance on models and especially over-reliance on a point estimate of a model and over-reliance on the comparative point estimate when people are using different switches and different factors and different inputs, just be very careful. Yeah. When we look at our book of business, it would be suicide to look at just one metric. You're looking at the entire distribution. You might have a great one in 100 and lousy one in 10 and lousy one in 20.
It might be a great one in 20 and 50, but if you hit the one in 250, you lose your company. You really need to take a look at the entire distribution. In some cases, PML is a great way of looking at it. In some cases, ROE is the best way of looking at it. Sometimes you just basically ask yourself, what's my expected profit versus my one in 10, one in 20, one in 50, one in 100 year loss? Am I going to make enough money over a cycle to actually pay for those losses? In the words of one of my old colleagues, make a dime, make a dime, make a dime, lose a buck. You got to figure all of those things when you're building that portfolio.
It's one metric, but I would hate to say that we are managing our business on that one metric.
That you are deciding which companies to invest in based on that one metric.
Another question, if it's okay. Much of the impressive capital return appears to be a function of the optimization of the portfolio and the changes that you've made, particularly with your 1 in 250 and so forth. That appears to have come a long way towards where you want it to be. What do you think is your more sustainable run rate of capital return relative to the earnings you generate, thinking in context of the growth that you can self-fund and what might be there for shareholders?
I've tried very hard to keep us to short-term guidance with regards to the stock repurchases. I can tell you that the way the portfolio is being constructed, given what our current capital base is, I can't imagine that in the near term foreseeable future, I can't imagine that we're going to need all of our retained income. I see stock repurchasing continuing for a period of time. How much? Well, that'll depend on a lot of things, and we'll give you short-term guidance on that. We expect stock repurchasing to continue for a while.
Thanks.
Joe, anything you want to add to that?
No, that's fine.
You're going to shoot me afterwards for giving guidance.
You looked a little mad. I'm just kidding. Question for Jay and Albert, I guess. Just trying to square a couple things. Jay, you kind of mentioned that alternative capital coming in could cause some capital displacement, I guess, for property cat writers or the traditional writers. Albert, you said that alternative capital coming in is, you're bullish. It's an opportunity. Trying to understand if, say hypothetically, you lose $100 million of business, property cat business you wrote, how much would you need to manage in the form of structures to offset or replicate the profitability that you lost from the business that you were writing?
Let me make a really short-term answer. We are huge buyers of cat reinsurance. It's not simply how much are we losing from the profits on the cat. We have some great meetings. Every time Jack has a great meeting on reinsurance buying, Jay moans.
Right.
The point is, we get benefits today. We're talking about, gee, Florida's difficult or this or that. Jack's really pleased with the most recent cat renewal.
All right.
We have a lot of natural offsets in our portfolio here. We can write against a cheap cat reinsurance environment. Even if we didn't write a lot of it, we could write primary business against it and then just buy reinsurance on the back. That wouldn't be a problem.
Given this dynamic that's proliferating, that would imply that Jack would grow his business on a gross basis, maybe cede more, and you would see some mix shift. Is that how you might respond?
Jay would find, depending on what the capital and the risk appetite is, Jay would find the right investors to fund that appetite, and he'll find the risk for it. We can take advantage of it on both sides.
The only thing I'd add to that is that it's not that two-dimensional as well. There are many dimensions on which we can pull levers to optimize the outcome given the market, given what's going on in the market. I'll leave it at that. The more levers we have, it's not a two-dimensional, this goes up, that has to go down, or this goes down, that has to go up. It's absolutely not a two-dimensional equation. If it was, it'd be a little easier, and I wouldn't be doing it.
Great. Thank you very much.
Over here?
Yes.
Yeah. Wanted to focus on the investment portfolio actually, and ask if you guys could see yourselves getting more aggressive given how short and how safe it's positioned. In a way, I'll preface that with, if you look at Alleghany buying Transatlantic, Markel into Alterra, you've got the emergence of SAC Re and Third Point LLC, you've got Berkshire Hathaway doing a lot of different things. Every one of the companies that I've mentioned really is an asset. Their strategy is more on the asset side than the underwriting side. You guys have focused most of today on why you're great at underwriting and why you're going to be even better.
Do you need to actually really re-risk or take more risk on the asset side to drive the ROE the next three, five, 10 years to compete with some of the guys I mentioned, or are you just playing a different game?
Yeah. I think the short answer to your question is no. We don't want to go longer with the portfolio for sure with the rise in interest rates. As far as a guideline for risk assets, we're at about 17.5% of our total portfolio in risk assets. We have capacity from our board and our investment committee to go slightly higher than that if we choose to. We really look at it just quarter-to-quarter as to whether or not we want to change that strategy. I think the short answer to your question is no, we wouldn't want to go longer, and we might take a little bit more risk on the risk asset side, but not a lot.
Okay. Then totally separate question, this is for Jay Nichols. Just looking at the cube. What is dynamic hedging? What does that mean within. That's one of the lines. I understood all the other things in there.
It's one of the other levers that I just talked about. If the opportunity to hedge a portion of our portfolio comes up, or in the businesses that we have, we should be much more dynamic about hedging our portfolio. It's not just about what's coming in, but it's about what can go out as well. We should be much more dynamic about the way we're. We will be. We have actually started to do that, to be more dynamic about what we avail ourselves of in terms of shaping our portfolio.
Okay, it's not retrocession because that's a separate line in the cube.
It's an element of retrocession, but it's a different component of retrocession. In retrocession, it's more of a program buy. My differentiation is on retrocession, it's a reinsurance purchase. Dynamic hedging can be finding inversely correlated transactions. It can be in just simple transactions in the ILW market that are more focused on our portfolio. It can be picking out very discrete portfolios to actually trade in and trade out of. I view it as a more nuanced element of retrocession. You mentioned it as a tool in the weather and commodity business as well, that it's not something you put on a risk and you hedge it. You look at how that risk evolves, and then you're more dynamic about hedging it.
I have another cube or diagram that I have that talks about looking at conditional probabilities. As conditions change, do you change your view about how you should be hedging? I think the reinsurance business. Talk about conditionality. Stephan gave his presentation about conditionality in the capital markets and how you react to the conditions in the trade credit market and the conditions in the surety market. Do we employ some element of conditional behavior? The question that I consistently pose is: can we use that conditional nature of our business to dynamically hedge?
Okay, thanks.
Thanks for asking.
Hi. I realize it was just announced yesterday, your intro into the weather derivative market or weather risk market. Just wanted to see what type of capital you guys are putting at risk there and how we should look at that risk profile, because one of your competitors a year and a half ago had some losses there due to warm U.K. winters. Just want to figure out how we should probably think about how you guys are taking risks there.
All right. I'll start. In any business that we get into, on the risk management side, first we set a limits profile as to how much we'll expose in limits. We're very prudent in the limits that we'll deploy. As we build out models and get more comfortable with models and dimensionalize the models, we then will expand to what I refer to as MFL and then PML. It takes a while to get to that space. We're very prudent about the risks we'll take. I can't give you a specific number. I know the number that those people lost. I follow that business very closely, and they actually made it back in three quarters. That was a very extreme event in terms of the temperature issue in that. It wasn't outside of the distribution of that entity from what I heard.
Our view is to leg into these businesses because we don't want to lose our driver's license. As you get into a business, if you have a significant loss in the first year, people will question how we do that. We want to earn our driver's license. We don't want to get in the car and hit the gas.
I guess I'd like to give a broader comment. One of the reasons that this appealed to us is that this weather and commodities rating derivative insurance unit, whatever you want to call it, touches a lot of our businesses. It touches the ag business, it touches technically some of the property cat lines, touches the energy business. At the very least, when you get a lot of smart people talking about a similar subject, good things come out of that conversation. There are, as of yet, unknown synergies that will come out of just having these conversations and these interactions with the team. I can't tell you what it is, but I'm pretty sure that something's going to come out of it. The broader question, which again, I think is important today to talk about the philosophy.
You are not going to have a book of business like ours or like any large company where you're not going to find in any one quarter something that blows up. It was a bad winter here, it was a bad flood there. That's the nature of our business. The nature of the business is not to avoid losses, but to create a portfolio that can absorb individual losses and over time generate a profit. I've said this all the time, risk management is not about avoiding risk. It's about taking risk that you can afford to take. If we were afraid that one line of business would give us a large loss this quarter, this season, this year, there wouldn't be a lot of lines of business we're in.
We're going to have a lot of conversations over the next decade about why did this thing blow up? It could be a surety loss, it could be a cat loss, it could be a D&O loss, it could be a liability. It'll be something. I absolutely will not promise that we won't have those losses. What I will promise is that we make sure that we absorb those losses and that over any period of time, the totality of the result compared to the totality of the volatility of the portfolio will be better than the peers in the industry.
Great. Just one quick separate follow-up. It seems like you guys are very interested in growing your agricultural business. It seems like you're growing it globally and through the reinsurance side. Would you ever have any ambitions to, I guess maybe go along with your A&H business to do a hybrid model and maybe do some primary in the ag space as well, or if you get expertise?
Currently, we are happy with our position in the reinsurance business. The model of trying to be a hybrid agriculture creates some conflicts that I'm not sure we want to expose ourselves to. We think we can access the portfolio that we need to and provide consultative product development or consultative seeding strategies with our clients from the reinsurance platform. It's not something I'm very happy with what we've got right now and looking to extend it and expand it. That comment is about the U.S. more importantly, the comment about chopping down the primary market.
Albert, my question gets to the point. I'm sorry, were you? Thanks. My question gets to the point you were making and you made earlier, a few questions ago or a few answers ago about being perfectly willing to take risks and the portfolio of risks will nonetheless be uncorrelated. Yes, we're taking risk, but we're in fact improving our risk reward profile. You're talking about underwriting risk, not capital market risk. That makes sense. The uncorrelated nature of those risks, certainly in property, the floods in Europe have nothing to do with an earthquake in the Middle East, what have you. My question is this, it's not an AXIS question, it's more of an industry question, and it's for my own education, I guess. Do you see correlations within the casualty side, setting aside property and cat?
Are there correlations within casualty that you've spotted and try to avoid or has that not been a challenge to this strategy of yours?
Mike, you want to try that first?
Correlation. Excellent.
I guess within our risk portfolio as well as all of the modeling that you see and the interaction between the different lines, we do a lot of stress testing on the portfolio. Looking at systemic shocks that may hit the portfolio and breaking that down into the different components that they could look at to make sure that we're comfortable with those outcomes as well as we think about the modeled approach to the portfolio. I can't think of any one of those at the moment that would give us sort of outside of the sort of the systemic shocks that we're putting through on the casualty side. I can't think of any one of those at the moment that would cause us to rethink the strategy in terms of the casualty as it interacts with the overall portfolio.
I think we mentioned sort of a question earlier about sort of what we think about inflation and its impact on that. I think again, sort of those are questions that we're challenged with. We're looking at stressing the portfolios, looking at really trying to understand how those dynamics move. Again, it's about gaining better understanding in that.
I just have a question on the accident and health side. Just for clarification, you said positive earnings contribution expected in 2014. If you had the premium mix that you want to have long term, you gave us this long term target premium mix, how would the profitability, how much premium would you need then to have a positive earnings contribution?
Well, it's really a question of size. I don't think it really would change all that much. The accident side is expected to produce a bit more profit. I think we just have to reach a minimum size first to cover our expenses. I don't know if I can calculate that for you as I sit here.
If you get $300 million insurance versus reinsurance, the mix, it doesn't really matter? You would get the profitability?
It's not that sensitive to it. Yeah. Based on our current mix and our plans for where we're going to grow, $300 million, we're not going to see a big shift in the difference between insurance, reinsurance or accident health in the next year.
Just one last point of clarification. On the long-term target mix, that 40% that's health, how does that break out between insurance and reinsurance?
I'd say the five-year mark will be about 50/50.
Thank you.
I just have a follow-up on the weather and the derivatives book and how you're going to go. Are you planning on that being writing multi-year products in that or is it going to be more annual product as an insurance basis? I guess trying to understand if there's going to be mark-to-markets on that book going forward.
Yeah. Most of the book, almost all of the business that we've looked at in the business plan is shorter than single year. It's single season. It will be mark-to-market, but the short duration should mitigate the mark-to-market impact.
Thank you.
I think we're done. All right, if there are no other questions, I think we will call this to a close and invite you to join us for cocktails.
Thank you.
Thank you very much.